<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 23, 1999)
$125,000,000
[Logo]
8 3/4% CONVERTIBLE SUBORDINATED NOTES DUE 2009
------------------------
We are offering $125,000,000 aggregate principal amount of our 8 3/4%
Convertible Subordinated Notes due September 29, 2009 (the 'Notes').
Concurrently, we are offering 3,000,000 shares of our common stock in a separate
offering.
The Notes will be convertible at your option, unless previously redeemed,
into shares of our common stock at any time at a conversion rate of 35.134
shares of common stock per Note, subject to adjustments we describe elsewhere.
Our common stock is traded on the Nasdaq National Market under the symbol
'CDRD.' On September 23, 1999, the last reported sale price of our common stock
was $24 3/4 per share.
We will pay interest on the Notes on March 29 and September 29 of each
year, commencing on March 29, 2000. The Notes will mature on September 29, 2009.
We may redeem the Notes, in whole or in part, at our option on or after
September 29, 2002, if the last reported sale price for our common stock is at
least 150% of the conversion price for at least 20 trading days within a period
of 30 consecutive days ending within five trading days of the call for
redemption. Upon a change of control event, each holder of the Notes may require
us to repurchase all or a portion of its Notes.
INVESTING IN THE NOTES INVOLVES RISKS. SEE 'RISK FACTORS' ON PAGE S-12 OF
THIS PROSPECTUS SUPPLEMENT AND BEGINNING ON PAGE 4 OF THE RELATED PROSPECTUS.
------------------------
<TABLE>
<CAPTION>
PER NOTE TOTAL
-------- -----
<S> <C> <C>
Public offering price(1)............................ 100% $125,000,000
Underwriting discount............................... 3% $3,750,000
Proceeds, before expenses, to CD Radio.............. 97% $121,250,000
</TABLE>
(1) Plus accrued interest from September 29, 1999, if settlement occurs
after that date
The underwriters may also purchase up to an additional $18,750,000
aggregate principal amount of the Notes at the public offering price, less the
underwriting discount, within 30 days from the date of this prospectus
supplement to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement is truthful or complete. Any representation to the
contrary is a criminal offense.
The Notes will be ready for delivery in New York, New York on or about
September 29, 1999.
------------------------
MERRILL LYNCH & CO.
LEHMAN BROTHERS
BEAR, STEARNS & CO. INC.
BANC OF AMERICA SECURITIES LLC
------------------------
The date of this prospectus supplement is September 23, 1999.
<PAGE>
Inside front cover
Photograph of East River at Lower Manhattan taken from Brooklyn showing the
Brooklyn Bridge, the World Trade Towers and the Woolworth Building at twilight.
Caption: A National Programming Powerhouse
CD Radio Logo
Up to 100 Channels of Programming
Coast to Coast, Seamless Coverage
Commercial Free Music
Inside front cover foldout
Three representations of photographs overlaid on a background of an automobile's
driver side dash board.
From left to right the first photograph shows three satellites in space. The
second photograph shows an automobile with a placement/connection schematic of
the Satellite Audio System. The third photograph shows the Digital
Display/Controller.
Caption: - Three Loral FS-1300 satellites
- Up to 100 channels of programming
- Coast to coast, seamless coverage
- Panasonic, Alpine, Delphi Delco and Recoton developing receivers
- Ford, Mazda, Jaguar and Volvo to install receivers
- National Broadcast Studio in New York City completed
- First terrestrial repeater buildout completed in San Francisco
50 Channels of Commercial-Free Music; up to 50 Channels of News,
Sports and Entertainment
Symphonic
Chamber Music
Opera
Top of the Charts
'50's Hits
'60's Hits
'70's Hits
'80's Hits
'90's Hits
Soft Rock
Love Songs
Singers & Songs
Beautiful Instrumentals
Broadway's Best
Big Bank/Swing
Classic Jazz
Contemporary Jazz
<PAGE>
NAC Jazz
New Age
Soul Ballads
Contemporary R&B
Classic Soul Hits
R&B Oldies
Rap/Hip Hop
Dance
Tropical
Latin Jazz
Boleros
Latin Contemporary
Merengue
Cumbia
Mexicana
Tex-Mex
Rock en Espanol
Country Hits
Modern Country
Classic Country
Folk Rock
Alternative Rock I
Alternative Rock II
Classic Rock I
Classic Rock II
Album Rock
Hard Rock/Metal
Blues
Reggae
World Beat
Gospel
Contemporary Christian
Children's Entertainment
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Special Note Regarding Forward Looking Statements........... S-4
Summary..................................................... S-5
Risk Factors................................................ S-12
Use of Proceeds............................................. S-12
Price Range of Common Stock................................. S-15
Dividend Policy............................................. S-15
Capitalization.............................................. S-16
Selected Historical Financial Data.......................... S-17
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. S-19
Business.................................................... S-26
Management.................................................. S-43
Certain Relationships and Related Transactions.............. S-45
Security Ownership of Certain Beneficial Owners and
Management................................................ S-45
Description of Notes........................................ S-49
Description of Certain Indebtedness......................... S-61
Certain Federal Income Tax Considerations................... S-63
Underwriting................................................ S-66
Legal Matters............................................... S-68
PROSPECTUS
Special Note Regarding Forward Looking Statements........... 2
About This Prospectus....................................... 3
About CD Radio.............................................. 3
Risk Factors................................................ 4
Ratio of Earnings to Combined Fixed Charges and Preferred
Stock Dividends........................................... 16
Use of Proceeds............................................. 16
Description of Debt Securities.............................. 16
Description of Capital Stock................................ 28
Description of Warrants..................................... 43
Plan of Distribution........................................ 46
Legal Matters............................................... 47
Experts..................................................... 47
Incorporation by Reference.................................. 47
Where You May Find Additional Available Information About
Us........................................................ 48
</TABLE>
------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE RELATED PROSPECTUS OR TO WHICH WE HAVE REFERRED YOU. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS
PROSPECTUS SUPPLEMENT AND THE RELATED PROSPECTUS MAY ONLY BE USED WHERE IT IS
LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT
AND THE RELATED PROSPECTUS MAY ONLY BE ACCURATE ON THE DATE OF THIS PROSPECTUS
SUPPLEMENT.
S-3
<PAGE>
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
The following cautionary statements identify important factors that could
cause our actual results to differ materially from those projected in the
forward looking statements made in this prospectus supplement and the related
prospectus. Any statements about our expectations, beliefs, plans, objectives,
assumptions or future events or performance are not historical facts and may be
forward looking. These statements are often, but not always, made through the
use of words or phrases such as 'will likely result,' 'are expected to,' 'will
continue,' 'is anticipated,' 'estimated,' 'intends,' 'plans,' 'projection' and
'outlook.' Accordingly, these statements involve estimates, assumptions and
uncertainties which could cause actual results to differ materially from those
expressed in them. Any forward looking statements are qualified in their
entirety by reference to the factors discussed throughout this prospectus
supplement and the related prospectus, and particularly the risk factors
described under 'Risk Factors' in the related prospectus. Among the significant
factors that have a direct bearing on our results of operations are:
the potential risk of delay in implementing our business plan;
increased costs of construction and launch of necessary satellites;
risk of launch failure;
unproven market and unproven applications of technology;
our dependence on Space Systems/Loral, Inc. ('Loral') and Lucent
Technologies, Inc.;
unavailability of receivers and antennas; and
our need for additional financing.
These and other factors are discussed in 'Risk Factors' in the related
prospectus and elsewhere in this prospectus supplement and the related
prospectus.
Because the risk factors referred to above could cause actual results or
outcomes to differ materially from those expressed in any forward looking
statements made by us or on our behalf, you should not place undue reliance on
any of these forward looking statements. Further, any forward looking statement
speaks only as of the date on which it is made, and we undertake no obligation
to update any forward looking statement or statements to reflect events or
circumstances after the date on which the statement is made or to reflect the
occurrence of unanticipated events. New factors emerge from time to time, and it
is not possible for us to predict which will arise. In addition, we cannot
assess with any precision the impact of each factor on our business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward looking statements.
S-4
<PAGE>
SUMMARY
This summary highlights information contained elsewhere in this prospectus
supplement and the related prospectus. Because it is a summary, it may not
contain all of the information that is important to you. To understand this
offering fully, you should read this entire prospectus supplement and the
related prospectus carefully, including the financial statements and the
documents incorporated by reference into the related prospectus.
ABOUT OUR BUSINESS
We are building a digital quality radio service that will broadcast up to
100 channels directly from satellites to vehicles. CD Radio will be broadcast
throughout the continental United States, over a frequency band, the 'S-band,'
that will augment traditional AM and FM radio bands. We hold one of only two
licenses issued by the Federal Communications Commission (the 'FCC') to build,
launch and operate a national satellite radio broadcast system. Under our FCC
license, we have the exclusive use of a 12.5 megahertz ('MHz') portion of the
S-band for this purpose. Our service, which will be primarily for motorists,
will offer 50 channels of commercial-free, digital quality music programming and
up to 50 channels of news, sports, talk and entertainment programming. We
currently expect to commence CD Radio broadcasts at the end of the fourth
quarter of 2000, at an anticipated subscription price of $9.95 per month.
As an entertainment company, we intend to design and originate programming
on each of our 50 commercial-free music channels. Each channel will be operated
as a separate radio station with a distinct format. These formats will include a
variety of classical, popular, rock, jazz, soul, contemporary, Latin, country,
alternative and children's music. The actual formats will be determined before
the launch of the service and may be varied from time to time to optimize
customer satisfaction. Some of the music channels will offer continuous music
while others will have program hosts, depending on the type of music
programming.
Programming on our non-music channels will be provided by third parties,
and to date we have entered into programming agreements with content providers
for 25 of these channels, including NPR, BBC, Bloomberg News Radio, C-SPAN and
Sports Byline USA. A majority of our non-music channels will contain
advertising, which will augment our subscription revenue. These channels will
include news and talk shows and special interest programming directed to a
diverse range of groups, including sports and outdoor enthusiasts, Hispanic
listeners and truck drivers.
On June 11, 1999, we entered into an agreement with FORD MOTOR COMPANY
which anticipates Ford manufacturing, marketing and selling vehicles that
include receivers capable of receiving CD Radio's broadcasts. We expect that the
first such vehicles will be available at the end of fourth quarter of 2000. This
exclusive agreement includes all seven Ford brands -- Ford, Lincoln, Mercury,
Mazda, Jaguar, Aston Martin and Volvo. In connection with this agreement, we
issued to Ford warrants that will enable Ford to purchase our common stock. Ford
may exercise its warrants based on the number of CD Radio receivers it installs
in vehicles and may exercise all of its warrants once it has installed CD Radio
receivers in four million vehicles.
We have also established relationships with major industry suppliers to
design and/or develop the most important elements of our system:
SPACE SYSTEMS/LORAL, INC. is constructing and will launch and deliver our
satellites in-orbit and checked-out. Loral is a leading full-service provider of
commercial satellite systems and services. Loral has scheduled the launch of our
satellites for January, March and May of 2000 on Proton launch vehicles.
LUCENT TECHNOLOGIES, INC. has completed the design for the overall
architecture of the CD Radio system and is developing and will manufacture a
custom designed chip set for use in CD Radio receivers.
DELCO ELECTRONICS CORPORATION is designing and developing and has agreed to
manufacture three-band receivers (AM/FM/CD Radio) and satellite antennas for
sale to major automotive
S-5
<PAGE>
manufacturers. Delco is the world's largest producer of audio systems for
original automotive equipment manufacturers and is a leader in mobile
communications technology. Delco has agreed to complete the design and
development work and have three-band receivers and antennas available for sale
to automobile manufacturers by March 2001.
ALPINE ELECTRONICS INC. is designing and developing FM modulated receivers
(which enable FM radios to receive CD Radio broadcasts) and three-band receivers
for installation by automotive manufacturers and sale to consumers in the
electronics aftermarket. Alpine, a leading manufacturer of high performance
mobile electronics, has specialized in car audio products for over 30 years and
has provided original high-end audio systems directly to many automotive
manufacturers, including Ford, Honda, Acura and BMW.
A subsidiary of Matsushita, the world's largest consumer electronics
company and the maker of PANASONIC products, is designing and developing
three-band receivers for installation by automotive manufacturers and for sale
to consumers in the electronics aftermarket.
RECOTON CORPORATION is designing and developing FM modulated receivers,
radio cards (wireless adapters for cassette players) and hard-wired and wireless
satellite antennas. Recoton, the owner of the Jensen, Advent, AR/Acoustic
Research and InterAct brands, is the third largest producer of aftermarket car
stereos sold in the United States and has one of the largest distribution
systems for automotive consumer electronics, with over 30,000 points of
presence.
THE CD RADIO DELIVERY SYSTEM
The CD Radio delivery system will consist of three principal components:
THE SATELLITES. To provide CD Radio, we have contracted with Loral to build
four satellites, to arrange for launch service providers to launch three of
these satellites and to deliver the three launched satellites, in-orbit, by June
30, 2000. We intend to hold the fourth satellite as a ground spare.
Our satellites will incorporate a design which will act as a 'bent pipe,'
relaying signals received from uplink transmittals directly to vehicles on the
ground. Our satellites will not contain on-board processors. All of our
processing operations will be on the ground where they will be accessible for
maintenance and continuing technological upgrade without the need to launch
replacement satellites.
In May 1998, we announced our plan to change the orbital location of our
satellites from geostationary orbits over the equator to inclined elliptical
orbits. This modification will allow our satellites to maximize the time spent
over the continental United States, which will permit us to fully utilize the
bandwidth allocated to us by the FCC. This modification must be approved by the
FCC, which we have requested.
THE NATIONAL BROADCAST STUDIO. We will originate up to 100 channels of
programming from our National Broadcast Studio in Rockefeller Center in New York
City. The National Broadcast Studio will house our music library, facilities for
programming origination, programming personnel and program hosts, and facilities
to transmit programming to our orbiting satellites, to activate or deactivate
service to subscribers and to perform the tracking, telemetry and control of our
satellites.
THE RECEIVERS. We expect consumers will receive CD Radio either by
purchasing specially designed radio receivers for their existing vehicles or
through a new generation of three-band radios which will come fully installed in
new vehicles by automobile manufacturers.
In the automotive aftermarket, we expect that CD Radio subscribers will
have the choice of one of three different receiving devices for their cars -- an
FM modulated receiver, a three-band receiver and a radio card.
FM Modulated Receivers. The CD Radio FM modulated receiver will be usable
in all vehicles that have an FM radio, which represent approximately 95%
of all U.S. vehicles. Each
S-6
<PAGE>
FM modulated receiver will operate with a device that will be
approximately the size of a 35mm camera and that will be mounted either in
the vehicle's trunk, behind the dashboard, in the glove compartment or
under a seat. We expect the retail price of this FM modulated receiver,
with a hard-wired satellite antenna and professional installation, will be
approximately $299.
Three-Band Receivers. We expect that consumers who wish to replace their
vehicle's sound system will be able to purchase receivers capable of
receiving AM, FM and CD Radio broadcasts. We expect the retail price of
these CD Radio-ready receivers, including the antenna and professional
installation, will be approximately $150 more than similar receivers which
are not capable of receiving CD Radio broadcasts.
Radio Cards. CD Radio's wireless adapter, or radio card, will not require
professional installation and will be usable by all vehicles in the United
States equipped with a cassette player, which represent approximately 65%
of all vehicles on the road. We expect the retail price of the radio card,
including the wireless satellite antenna, will be approximately $199.
All CD Radio receivers will have a visual display that will indicate the
channel and format selected, as well as the title, recording artist and album
title of the musical selection being played.
Each of the elements of the CD Radio system -- satellites, terrestrial
repeater network, National Broadcast Studio and CD Radio receivers -- is on
schedule to permit us to begin operations at the end of the fourth quarter of
2000.
We believe there will be significant consumer demand for CD Radio. Market
research conducted for us by The Yankee Group, Inc. shows that radio listeners
today are substantially dissatisfied with both AM and FM radio because of
frequent commercial interruptions, lack of variety in programming and loss of
signal strength. CD Radio's commercial-free music, wide variety of formats and
nearly seamless national coverage have been designed to address these key
disadvantages of existing commercial radio.
CONCURRENT OFFERING
Concurrently with this notes offering we are offering 3,000,000 shares of
our common stock. We intend to use the net proceeds of the stock offering to
partially finance the construction and launch of our satellites and for general
corporate purposes. The offerings will raise net proceeds to us of approximately
$187 million: $119 million from this notes offering and $68 million from the
stock offering. Please refer to the section in this prospectus supplement
entitled 'Use of Proceeds.' We cannot assure you that we will complete the
concurrent offering of our common stock. See 'Risk Factors' on page S-12 of this
prospectus supplement.
This prospectus supplement does not constitute an offer to sell or a
solicitation of an offer to buy shares of our common stock. We will register
these shares under the Securities Act and will offer them only by means of a
separate prospectus supplement.
FINANCING
We estimate that we will require approximately $1,170 million to develop
and commence commercial operation of CD Radio by the end of the fourth quarter
of 2000. Upon completion of this offering and the concurrent offering of our
common stock, we will have raised or obtained commitments or identified sources
for all our preoperational funding requirements, consisting of:
$572 million of equity (including $98 million from Prime 66 Partners,
L.P., $129 million from Apollo Investment Fund IV, L.P. and Apollo
Overseas Partners IV, L.P. (the 'Apollo Investors') and an additional $63
million which we expect to receive shortly after the completion of this
offering from the sale of our 9.2% Series B Cumulative Convertible
Preferred Stock to the Apollo Investors), and
S-7
<PAGE>
$616 million of debt (including $115 million of debt to be repaid by the
earlier of February 29, 2000 and ten days prior to the launch of our
second satellite and an additional $106 million which Bank of America may,
but is not required to, arrange).
While this amount is approximately $18 million more than we expect to need to
fund our operations through the end of the fourth quarter of 2000, we also
anticipate cash requirements of approximately $150 million to fund our
operations through the first full year of operations. We cannot assure you,
however, that these funds will be sufficient. Our actual funding requirements
could materially exceed our projections, due to a variety of factors, some of
which are outside of our control. We intend to seek additional financing through
the issuance of debt or equity securities, or a combination of debt and equity
securities, in the public or private markets. However, we cannot assure you that
we will be able to obtain additional financing on favorable terms, or at all, or
that additional financing will be available in a timely manner.
RISK FACTORS
Please refer to the section entitled 'Risk Factors' on page S-12 of this
prospectus supplement and beginning on page 4 of the related prospectus for a
discussion of some of the risks you should consider in connection with this
offering of our convertible notes.
- ------------------------
Our principal executive offices are located at 1221 Avenue of the Americas,
New York, New York 10020. Our telephone number is (212) 584-5100. Our internet
address is cdradio.com. The information on our website is not incorporated in
this prospectus supplement or the related prospectus.
S-8
<PAGE>
THE NOTES OFFERING
<TABLE>
<S> <C>
Securities Offered........................... $125,000,000 aggregate principal amount (excluding
$18,750,000 aggregate principal amount subject to the
Underwriters' over-allotment option) of Convertible
Subordinated Notes due 2009 (the 'Notes').
Interest..................................... 8 3/4% per annum on the principal amount, payable
semiannually in arrears on March 29 and September 29
of each year commencing March 29, 2000.
Denominations................................ The Notes will be issued in denominations of $1,000
principal amount and integral multiples thereof.
Conversion Rights............................ Each Note will be convertible, at the option of the
holder, at any time on or prior to maturity, unless
previously redeemed or otherwise purchased, into
shares of our common stock at a conversion rate of
35.134 shares per Note (equivalent to a conversion
price of $28.4625 per share of common stock). The
conversion rate will be subject to adjustment upon
the occurrence of certain events affecting our common
stock. Subject to certain exceptions, upon
conversion, the holder will not receive any cash
payment representing any further interest; such
accrued cash interest will be deemed paid by the
shares of common stock received by the holder on
conversion. See 'Description of Notes -- Conversion
Rights.'
Ranking...................................... The Notes will be unsecured obligations of CD Radio
and will be subordinated to our existing and future
senior indebtedness. The Notes will be effectively
subordinated to the indebtedness and other
obligations of our subsidiaries. At June 30, 1999, we
had $479.7 million of senior indebtedness
outstanding, and our subsidiary had no such
indebtedness outstanding. The Indenture does not
restrict the incurrence by us or our subsidiaries of
indebtedness or other obligations.
Sinking Fund................................. None.
Optional Redemption.......................... We may not redeem the Notes prior to September 29,
2002. On and after such date, the Notes are
redeemable for cash at any time at our option, in
whole or in part, at redemption prices set forth
herein, plus accrued and unpaid interest to the date
of redemption, if the last reported sale price for
our common stock is at least 150% of the conversion
price for at least 20 trading days within a period of
30 consecutive days ending within five trading days
of the call for redemption. See 'Description of
Notes -- Redemption of Notes at the Option of the
Company.'
Use of Proceeds.............................. We intend to use the net proceeds of this offering of
our Notes to partially finance the construction and
launch of our satellites and for general corporate
purposes.
</TABLE>
S-9
<PAGE>
<TABLE>
<S> <C>
DTC Eligibility.............................. Except as hereinafter described, Notes will be issued
in fully registered book-entry form and will be
represented by one or more permanent global Notes
without coupons deposited with a custodian for and
registered in the name of a nominee of The Depository
Trust Company ('DTC') in New York, New York.
Beneficial interests in any such global Note will be
shown on, and transfers thereof will be effected only
through, records maintained by DTC and its direct and
indirect participants and any such interest may not
be exchanged for certificated Notes, except in
limited circumstances described herein. Settlement
and all secondary market trading activity for the
Notes will be in same day funds. See 'Description of
Notes -- Form, Denomination and Registration.'
Trading...................................... We can provide no assurance as to the liquidity of or
trading markets for the Notes. Our common stock is
listed on the Nasdaq National Market under the symbol
'CDRD.'
</TABLE>
S-10
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data for CD Radio shown below as of and
for the years ended December 31, 1994, 1995, 1996, 1997 and 1998, are derived
from CD Radio's respective audited consolidated financial statements. Our
financial statements as of December 31, 1997 and 1998 and for the three years
ended December 31, 1998 are incorporated by reference in the related prospectus.
The financial information as of and for the six months ended June 30, 1998 and
1999 is derived from unaudited consolidated financial statements incorporated by
reference into the related prospectus. In the opinion of management, the
unaudited consolidated financial statements include all adjustments, consisting
of normal recurring accruals, that are necessary for a fair presentation of the
financial position and results of operations for these periods. The summary
consolidated financial data should be read together with the Consolidated
Financial Statements, the related notes and the information contained in this
prospectus supplement under the heading 'Management's Discussion and Analysis of
Financial Condition and Results of Operations.'
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues................................... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Net loss(1).......................................... (4,065) (2,107) (2,831) (4,737) (48,396) (36,015) (23,045)
Preferred stock dividends............................ -- -- -- (2,338) (19,380) (9,219) (14,852)
Preferred stock deemed dividends(2).................. -- -- -- (51,975) (11,676) -- (4,534)
Accretion of dividends in connection with the
issuance of warrants on preferred stock............ -- -- -- -- (6,501) (6,372) (148)
Net loss applicable to common stockholders........... (4,065) (2,107) (2,831) (59,050) (85,953) (51,606) (42,579)
Per common share:
Net loss applicable to common stockholders....... (0.48) (0.23) (0.29) (5.08) (4.79) (3.13) (1.83)
Weighted average common shares outstanding (basic
and diluted)................................... 8,398 9,224 9,642 11,626 17,932 16,493 23,245
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents............................ $ 3,400 $ 1,800 $ 4,584 $ 900 $204,753 $ 64,741 $235,670
Marketable securities, at market(3).................. -- -- -- 169,482 60,870 65,884 40,555
Restricted investments, at market.................... -- -- -- -- -- -- 79,803
Working capital...................................... 2,908 1,741 4,442 170,894 180,966 129,673 204,693
Total assets......................................... 3,971 2,334 5,065 323,808 643,880 297,899 920,932
Short-term notes payable............................. -- -- -- -- 70,863 -- 95,526
Deferred satellite payments.......................... -- -- -- -- 31,324 -- 46,102
Long-term debt....................................... -- -- -- 131,387 153,033 138,369 338,098
10 1/2% Series C Preferred Stock..................... -- -- -- 176,025 156,755 93,629 165,627
9.2% Series A Junior Preferred Stock................. -- -- -- -- 137,755 -- 143,855
Deficit accumulated during the development stage..... (13,598) (15,705) (18,536) (23,273) (71,669) (59,288) (94,714)
Stockholders' equity................................. 3,431 1,991 4,898 15,980 77,953 52,889 72,743
</TABLE>
- ------------
(1) Included in the 1998 net loss of ($48,396) is ($25,682) of special charges
related primarily to the termination of some launch and orbit related
contracts required when we decided to enhance our satellite delivery system
to include a third in-orbit satellite.
(2) The deemed dividend in 1997 relates to the discount feature associated with
our former 5% Delayed Convertible Preferred Stock and the deemed dividend in
1998 relates primarily to the conversion feature associated with our 9.2%
Series A Junior Preferred Stock. We computed these deemed dividends in
accordance with the Commission's position on accounting for preferred stock
which is convertible at a discount to the market price.
(3) Marketable securities consist of fixed income securities with a maturity at
the time of purchase of greater than three months.
S-11
<PAGE>
RISK FACTORS
In addition to the other information in this prospectus supplement, the
following risk factors should be considered carefully in evaluating us and our
business and in deciding whether to invest in our securities.
OUR CONCURRENT STOCK OFFERING MAY NOT BE SUCCESSFUL, IN WHICH CASE WE WILL NEED
ADDITIONAL FINANCING IN THE FUTURE TO BUILD OUR SYSTEM AND LAUNCH OUR SERVICE
The information in this prospectus supplement assumes that we will
successfully complete our concurrent common stock offering. However, we cannot
assure you that our concurrent common stock offering will be successfully
completed. If we are unsuccessful in completing the concurrent common stock
offering, then our total funds raised, committed or identified to date, after
giving effect to the receipt of the net proceeds of this offering, would be
$1,120 million. Accordingly, we would be required to raise an additional $50
million of net proceeds to fund our operations through the end of the fourth
quarter of 2000.
YOUR RIGHT TO RECEIVE PAYMENTS ON THE NOTES IS SUBORDINATED TO ALL OF OUR
EXISTING AND FUTURE SENIOR INDEBTEDNESS; THE NOTES ARE EFFECTIVELY SUBORDINATED
TO INDEBTEDNESS OF OUR SUBSIDIARIES
The Notes will be unsecured obligations and will be subordinated in right
of payment, as provided in the indenture under which they are issued, to the
prior payment in full in cash or other payment satisfactory to holders of Senior
Indebtedness of all our existing and future Senior Indebtedness. Senior
Indebtedness is defined to include, among other things, all indebtedness for
money borrowed and indebtedness evidenced by securities, debentures, bonds or
other similar instruments, other than indebtedness that is expressly junior in
right of payment to the Notes or ranks pari passu in right of payment to the
Notes. At June 30, 1999, our Senior Indebtedness was approximately $479.7
million, and our subsidiary had no such indebtedness. The terms of the Notes do
not limit the amount of additional indebtedness, including Senior Indebtedness,
which we can create, incur, assume or guarantee. Upon any distribution of our
assets pursuant to any insolvency, bankruptcy, dissolution, winding up,
liquidation or reorganization, the payment of the principal of and interest on
the Notes will be subordinated to the extent provided in the Indenture to the
prior payment in full of all of our Senior Indebtedness, and there may not be
sufficient assets remaining to pay amounts due on any or all of the Notes then
outstanding. In addition, we may not repurchase any Notes in certain
circumstances involving a Change in Control if at such time the subordination
provision of the indenture would prohibit us from making payments in respect of
the Notes. The failure to repurchase the Notes when required would result in an
Event of Default under the indenture and would constitute a default under the
terms of our other indebtedness. See 'Description of Notes -- Subordination of
Notes.'
The Notes are effectively subordinated to all existing and future
liabilities of our subsidiaries. Any right of ours to receive assets of any of
our subsidiaries upon their liquidation or reorganization (and the consequent
right of the holders of the Notes to participate in those assets) will be
subject to the claims of that subsidiary's creditors (including trade
creditors), except to the extent that we ourselves are recognized as a creditor
of that subsidiary, in which case our claims would still be subordinate to any
security interests in the assets of that subsidiary and any indebtedness of that
subsidiary senior to that held by us.
USE OF PROCEEDS
We estimate that the net proceeds to us from this notes offering will be
approximately $119 million after deducting estimated discounts, commissions and
other expenses. We intend to use the net proceeds of this notes offering to
partially finance the construction and launch of our satellites and for general
corporate purposes. Concurrently, we are offering 3,000,000 shares of our common
stock. We also intend to use the net proceeds of the stock offering, estimated
at approximately $68 million, to partially finance the construction and launch
of our satellites and for general corporate purposes. We cannot assure you that
we will complete the concurrent offering of our shares of common stock. See
'Risk Factors' above.
S-12
<PAGE>
SOURCES AND USES OF FUNDS BY CD RADIO
The following table describes our estimated sources and uses of funds from
our inception through the end of the fourth quarter of 2000, when we expect to
commence operations. Assuming the availability of the funds committed or
identified to date, including the proceeds from this offering and our concurrent
stock offering, we anticipate that we will exceed our pre-operational funding
requirements by $18 million. However, we anticipate funding requirements of $150
million to fund our operations through the first full year of operations. The
projection of total sources and total uses of funds is forward looking and could
vary, perhaps substantially, from actual sources and uses, due to events outside
our control, including unexpected costs and unforeseen delays. Please refer to
the section in this prospectus supplement entitled 'Special Note Regarding
Forward Looking Statements.'
PRE-OPERATIONAL PERIOD
SOURCES OF FUNDS
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Net Funds Committed or Identified to Date:
Vendor and bank financing(1)....................... $ 269
Senior Secured Notes(2)............................ 111
Senior Secured Discount Notes...................... 117
Preferred Stock(3)................................. 250
Common Stock and Warrants(4)....................... 191
Option for sale of Preferred Stock(5).............. 63
Proceeds of this notes offering.................... 119
Proceeds of the concurrent stock offering.......... 68
------
Funds to date(6).............................. $1,188
------
------
</TABLE>
USES OF FUNDS
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
FCC License............................................. $ 83
Loral Satellite Contract(7):
Satellites......................................... 453
Launch services.................................... 283
Insurance............................................... 34
Ground segment(8)....................................... 120
Operating and other cash expenses(9).................... 197
------
Total pre-operational uses.................... $1,170
------
Funds available for post-operational uses............... 18
------
Total......................................... $1,188
------
------
</TABLE>
- ------------
(1) Consists of (a) our existing credit facility provided by Bank of America and
other lenders in an aggregate principal amount of up to $115 million,
(b) $50 million of vendor financing provided by Loral and (c) an additional
credit facility Bank of America may (but is not obligated to) arrange for
us. Net proceeds to us from the credit facilities referred to in clauses (a)
and (c) above give effect to aggregate expenses of approximately $6 million.
Our existing credit facility matures on the earlier of February 29, 2000 and
ten days prior to the launch of our second satellite. We have entered into
an agreement with Bank of America under which Bank of America has agreed to
attempt to arrange a syndicate of lenders to provide the term loan facility
referred to in clause (c) above in the aggregate principal amount of $225
million (of which $115 million would be used to repay the existing credit
facility). Bank of America has not committed to provide these loans and we
cannot assure you that these loans will be
(footnotes continued on next page)
S-13
<PAGE>
(footnotes continued from previous page)
arranged or the terms of these loans will be acceptable to us. The
availability of these loans when required to repay amounts outstanding at
maturity under our existing credit facility, will be influenced by a variety
of factors, some of which, including the market for syndicated bank loans
generally, are outside of our control. See 'Description of Certain
Indebtedness -- Vendor Financing' and 'Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources.'
(2) Includes proceeds from sale of related warrants.
(3) Includes net proceeds of approximately (a) $121 million from the issuance of
5,400,000 shares of 5% Preferred Stock in a private placement and (b) $129
million from the issuance of 1,350,000 shares of our 9.2% Series A Junior
Cumulative Convertible Preferred Stock to the Apollo Investors.
(4) Includes (a) an aggregate of $22 million, including from the sale of common
stock and warrants, raised before the award of our FCC license, (b) $24.5
million of net proceeds from the sale of 1,905,488 shares of common stock to
Loral Space & Communications Ltd. in August 1997, (c) $46.4 million of net
proceeds from the sale of 3,050,000 shares of common stock in a public
offering in November 1997 and (d) $98 million of net proceeds from the sale
of 5,000,000 shares of common stock to Prime 66 in November 1998.
(5) We have exercised an option granted us by the Apollo Investors to sell them
a total of 650,000 shares of 9.2% Series B Junior Cumulative Convertible
Preferred Stock for $65 million. Subject to customary conditions and there
not having occurred a material adverse change to our business, management or
financial condition, we expect to sell these shares to the Apollo Investors
for net proceeds to us of $63 million.
(6) If Bank of America is unable to arrange a new credit facility, we will need
to raise $115 million to refinance the existing credit facility in the first
quarter of 2000 and an additional $88 million to fund our operations through
the end of the fourth quarter of 2000.
(7) This amount includes $15 million of long lead-time parts for a fifth
satellite and $3 million for integration analysis of the viability of using
the Sea Launch platform as an alternative launch vehicle for our satellites.
As of August 31, 1999, we had satisfied $376 million under the Loral
Satellite Contract.
(8) Includes (a) an estimated $58 million for the construction and development
of our National Broadcast Studio, which includes costs associated with the
acquisition of programming, the purchase of tracking, telemetry and control
equipment and the construction of two earth stations in South America by
Loral Skynet, and (b) $62 million for terrestrial repeaters.
(9) Includes (a) cumulative historical cash operating expenses through June 30,
1999 of approximately $66 million, including $25.7 million of expenses
resulting primarily from our termination of our launch agreement with
Arianespace, and (b) projected operating and other capital expenses,
including operation of our terrestrial repeater network, pre-operational
marketing expenses, expenses relating to the development of receivers and
other general and administrative expenses from July 1, 1999 through the end
of the pre-operational period of $131 million.
S-14
<PAGE>
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on the Nasdaq National Market since
October 24, 1997 and before that date was traded on the Nasdaq Small Cap Market,
in each case under the symbol 'CDRD.' The following table sets forth the high
and low sales prices for our common stock, as reported by the Nasdaq National
Market, for the periods indicated below since October 24, 1997, and the high and
low bid prices for our common stock, as reported by the National Association of
Securities Dealers Automated Quotation System, for the periods indicated below
prior to that date. The latter prices reflect interdealer quotations without
retail markups, markdowns, fees or commissions and do not necessarily reflect
actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1997:
First Quarter.......................................... $ 8 $ 3 9/16
Second Quarter......................................... 20 1/4 10 3/4
Third Quarter.......................................... 20 14
Fourth Quarter......................................... 24 5/8 16 5/8
1998:
First Quarter.......................................... 24 1/4 11 1/2
Second Quarter......................................... 44 21 3/4
Third Quarter.......................................... 38 7/16 14 3/4
Fourth Quarter......................................... 39 7/8 14 1/4
1999:
First Quarter.......................................... 38 5/8 20 1/2
Second Quarter......................................... 32 19 1/2
Third Quarter (through September 23, 1999)............. 38 1/2 24 3/4
</TABLE>
On September 23, 1999, the last reported sale price of our common stock on
the Nasdaq National Market was $24 3/4 per share. On August 31, 1999, there were
approximately 230 holders of record of our common stock.
DIVIDEND POLICY
We have never paid cash dividends on our capital stock. We currently intend
to retain earnings, if any, for use in our business and do not anticipate paying
any cash dividends in the foreseeable future. The indentures governing our
senior secured notes and our senior secured discount notes and our bank credit
agreement contain provisions that limit our ability to pay dividends on our
preferred stock and our common stock. The certificates of designation for our
preferred stock contain provisions that also limit our ability to pay dividends
on our common stock.
S-15
<PAGE>
CAPITALIZATION
The following table sets forth the cash and capitalization of CD Radio as
of June 30, 1999 (1) on a historical basis and (2) as adjusted for this notes
offering, the stock offering (based on the public offering price of $24 3/4 per
share) and the sale of our 9.2% Series B Junior Cumulative Convertible Preferred
Stock to Apollo, in each case after deducting estimated discounts, commissions
and other expenses.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
----------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and marketable securities, at $276,225 $ 526,115
market(1).................................................
-------- ----------
-------- ----------
Restricted investments(2)................................... $ 79,803 $ 79,803
-------- ----------
-------- ----------
Debt obligations:
Short-term notes payable............................... $ 95,526 $ 95,526
-------- ----------
-------- ----------
Long-term obligations
Deferred satellite payments, long-term................. $ 46,102 $ 46,102
15% Senior Secured Discount Notes due 2007............. 168,974 168,974
14 1/2% Senior Secured Notes due 2009.................. 168,979 168,979
8 3/4% Convertible Subordinated Notes due 2009......... -- 125,000
-------- ----------
Total long-term debt obligations.................. 384,055 509,055
-------- ----------
10 1/2% Series C Convertible Preferred Stock................ 165,627 165,627
9.2% Series A Junior Cumulative Convertible Preferred
Stock..................................................... 143,855 143,855
9.2% Series B Junior Cumulative Convertible Preferred
Stock..................................................... -- 63,000
Stockholders' equity
Common stock, at par value, $0.001 per share(3)........ 23 26
Additional paid-in capital(3).......................... 167,434 235,321
Accumulated deficit.................................... (94,714) (94,714)
-------- ----------
Total capitalization.............................. $766,280 $1,022,170
-------- ----------
-------- ----------
</TABLE>
- ------------
(1) Marketable securities consist of fixed income securities with a maturity at
the time of purchase of greater than three months.
(2) Value of securities held by the trustee for our senior secured notes to fund
the first six
scheduled semi-annual payments on those notes.
(3) All capitalization information excludes: (a) options outstanding as of
June 30, 1999 to purchase 4,946,375 shares of common stock, (b) warrants
(other than those referred to in clause (c) below) issuable as of June 30,
1999 to purchase 4,979,322 shares of common stock and (c) warrants issued to
Ford on June 11, 1999 to purchase up to 4,000,000 shares of common stock.
S-16
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The selected consolidated financial data for CD Radio shown below as of and
for the years ended December 31, 1994, 1995, 1996, 1997 and 1998 are derived
from CD Radio's respective audited consolidated financial statements. Our
financial statements as of December 31, 1997 and 1998 and for the three years
ended December 31, 1998 are incorporated by reference into the related
prospectus. The financial information as of and for the six months ended June
30, 1998 and 1999 is derived from the unaudited consolidated financial
statements incorporated by reference into the related prospectus. In the opinion
of management, the unaudited consolidated financial statements include all
adjustments, consisting of normal recurring accruals, that are necessary for a
fair presentation of the financial position and results of operations for these
periods. You should read the selected consolidated financial data together with
the Consolidated Financial Statements, the related notes and the information
contained in this prospectus supplement under the heading 'Management's
Discussion and Analysis of Financial Condition and Results of Operations.'
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- ---------------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues...................... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Net loss(1)............................. (4,065) (2,107) (2,831) (4,737) (48,396) (36,015) (23,045)
Preferred stock dividends............... -- -- -- (2,338) (19,380) (9,219) (14,852)
Preferred stock deemed dividends(2)..... -- -- -- (51,975) (11,676) -- (4,534)
Accretion of dividends in connection
with the issuance of warrants on
preferred stock....................... -- -- -- -- (6,501) (6,372) (148)
Net loss applicable to common
stockholders.......................... (4,065) (2,107) (2,831) (59,050) (85,953) (51,606) (42,579)
Per common share:
Net loss (basic and diluted)........ (0.48) (0.23) (0.29) (0.41) (2.70) (2.18) (0.99)
Preferred stock dividend............ -- -- -- (0.20) (1.08) (0.56) (0.64)
Preferred stock deemed dividend..... -- -- -- (4.47) (0.65) -- (0.19)
Accretion of dividends in connection
with the issuance of warrants on
preferred stock................... -- -- -- -- (0.36) (0.39) (0.01)
Net loss applicable to common
stockholders...................... (0.48) (0.23) (0.29) (5.08) (4.79) (3.13) (1.83)
Ratio of earnings to fixed charges(3)... -- -- -- -- -- -- --
Deficiency of earnings to fixed
charges............................... 4,065 2,107 2,831 4,760 62,344 38,766 46,437
Weighted average common shares
outstanding (basic and diluted)....... 8,398 9,224 9,642 11,626 17,932 16,493 23,245
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents............... $ 3,400 $ 1,800 $ 4,584 $ 900 $204,753 $ 64,741 $ 235,670
Marketable securities, at market(4)..... -- -- -- 169,482 60,870 65,884 40,555
Restricted investments, at market(5).... -- -- -- -- -- -- 79,803
Working capital......................... 2,908 1,741 4,442 170,894 180,966 129,673 204,693
Total assets............................ 3,971 2,334 5,065 323,808 643,880 297,899 920,932
Short-term notes payable................ -- -- -- -- 70,863 -- 95,526
Deferred satellite payments............. -- -- -- -- 31,324 -- 46,102
Long-term debt.......................... -- -- -- 131,387 153,033 138,369 338,098
10 1/2% Series C Preferred Stock........ -- -- -- 176,025 156,755 93,629 165,627
9.2% Series A Preferred Stock........... -- -- -- -- 137,755 -- 143,855
Deficit accumulated during the
development stage..................... (13,598) (15,705) (18,536) (23,273) (71,669) (59,288) (94,714)
Stockholders' equity.................... 3,431 1,991 4,898 15,980 77,953 52,889 72,743
Book value per common share............. 0.37 0.21 0.48 1.00 3.36 3.00 3.12
</TABLE>
- ------------
(1) Included in the 1998 net loss of ($48,396) is ($25,682) of special charges
related primarily to the termination of certain launch and orbit related
contracts required when we decided to enhance our satellite delivery system
to include a third in-orbit satellite.
(2) The deemed dividend in 1997 relates to the discount feature associated with
our former 5% Delayed Convertible Preferred Stock and the deemed dividend in
1998 relates primarily to the conversion feature associated with our 9.2%
Series A Junior Preferred Stock. We computed these deemed dividends in
accordance with the Commission's position on accounting for preferred stock
which is convertible at a discount to the market price.
(footnotes continued on next page)
S-17
<PAGE>
(footnotes continued from previous page)
(3) For purposes of this computation, earnings are defined as losses plus fixed
charges. Fixed charges are the sum of (a) interest expensed and capitalized,
(b) amortization of deferred financing costs, premium and debt discounts and
(c) the portion of operating lease rental expense that is representative of
the interest factor (deemed to be one-third). Our ratio of earnings to fixed
charges was less than 1.00 for the years ended December 31, 1994, 1995,
1996, 1997 and 1998 and for the six months ended June 30, 1998 and 1999;
thus earnings available for fixed charges were inadequate to cover fixed
charges for these periods.
(4) Marketable securities consist of fixed income securities with a maturity at
the time of purchase of greater than three months.
(5) Value of securities held by the trustee for our senior secured notes to fund
the first six scheduled semi-annual interest payments on those notes.
S-18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This prospectus supplement contains forward-looking statements within the
meaning of the federal securities laws. Actual results and the timing of some
events could differ materially from those projected in the forward-looking
statements due to a number of factors, including those described under 'Risk
Factors' in the related prospectus and elsewhere in this prospectus supplement
and the related prospectus. See 'Special Note Regarding Forward Looking
Statements.'
OVERVIEW
CD Radio was organized in May 1990 and is in its development stage. Our
principal activities to date have included technology development, terrestrial
repeater network development, arranging for design and development of chip sets
and receivers, obtaining regulatory approval for the CD Radio service,
commencement of construction of four satellites, acquisition of content for our
programming, strategic planning, market research, recruitment of our management
team and securing financing for working capital and capital expenditures. We do
not expect to generate any revenues from operations until the first quarter of
2001, at the earliest, and we expect that positive cash flow from operations
will not be generated until the third quarter of 2001, at the earliest. In
addition, we require additional capital to complete development and commence
operations of CD Radio. Our actual funding requirements could materially exceed
our projections, due to a variety of factors, some of which are outside of our
control. We cannot assure you that we will ever commence operations, that we
will attain any particular level of revenues or that we will achieve
profitability. For further information about these risks, please refer to the
section of the related prospectus entitled 'Risk Factors.'
Upon commencing operations, we expect our primary source of revenues to be
monthly subscription fees. We currently anticipate that our subscription fee
will be approximately $9.95 per month to receive CD Radio broadcasts, with a one
time, modest activation fee per subscriber. In addition, we expect to derive
additional revenues from directly selling or bartering advertising time on our
non-music channels. We do not intend to manufacture the consumer electronic
devices necessary to receive CD Radio and thus will not receive any revenues
from their sale. Although we hold patents covering some of the technology which
will be used in these consumer electronic devices, we expect to license our
technology to manufacturers at no charge.
We expect that the operating expenses associated with operations will
consist primarily of marketing, sales, programming, maintenance of the satellite
and broadcasting system and general and administrative costs. Costs to acquire
programming are expected to include payments to build and maintain an extensive
music library and royalty payments for broadcasting music (calculated based on a
percentage of revenues). Marketing, sales, general and administrative costs are
expected to consist primarily of advertising costs, salaries of employees, rent
and other administrative expenses. As of September 3, 1999, we had 71 employees
and 18 part-time consultants. We expect to have approximately 150 employees by
the time we commence operations.
In addition to funding initial operating losses, we require funds for
working capital, interest and financing costs on borrowings and capital
expenditures in the near term.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998
We recorded net losses of $23,045,000 and $36,015,000 for the six months
ended June 30, 1999 and 1998, respectively. Our total operating expenses were
$25,762,000 and $30,898,000 for the six months ended June 30, 1999 and 1998,
respectively. Excluding the special charges totaling $25.7 million recorded in
the 1998 second quarter, we recorded a net loss of $10,333,000 and operating
expenses of $5,216,000 for the six months ended June 30, 1998.
Engineering design and development costs were $14,344,000 and $774,000 for
the six months ended June 30, 1999 and 1998, respectively. Engineering costs
increased in the 1999 period
S-19
<PAGE>
primarily due to payments to Lucent in connection with the chip set development
effort and payments to consumer electronic manufacturers in connection with
receiver development efforts.
General and administrative expenses increased for the six months ended June
30, 1999 to $11,418,000 from $4,442,000 for the six months ended June 30, 1998.
General and administrative expenses increased due to the occupancy of our new
offices and national broadcast studio and the growth of our management team and
the workforce necessary to develop and commence the broadcast of CD Radio. The
major components of general and administrative expenses in the 1999 period were
salaries and employment related costs (30%), rent and occupancy costs (25%) and
legal and regulatory fees (14%), while in the 1998 period the major components
were salaries and employment related costs (27%), rent and occupancy costs
(16%), and legal and regulatory fees (15%). The remaining portion of general and
administrative expenses (31% in the 1999 period and 42% in the 1998 period)
consisted of other costs such as insurance, market research, consulting, travel,
depreciation and supplies, with no such amount exceeding 10% of the total in the
1999 period and only consulting (16%) exceeding 10% of the total in the 1998
period.
The increase of interest income to $6,400,000 for the six months ended June
30, 1999, from $3,903,000 in the six months ended June 30, 1998, was the result
of higher average balances of cash, marketable securities and restricted
investments during the 1999 period. The higher average balances of cash,
marketable securities and restricted investments during the period were due to
the proceeds from the issuance of notes in the second quarter of 1999 and stock
sales during the fourth quarter of 1998 exceeding the amount of expenditures for
satellite and launch vehicle construction, other capital expenditures and
operating expenses.
Interest expense, net of capitalized interest, decreased to $3,683,000 for
the six months ended June 30, 1999, from $8,982,000 in the 1998 period. This
decrease in net interest expense was due to capitalized interest increasing by
an amount ($20,326,000) greater than the corresponding increase in interest
expense ($15,027,000).
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
We recorded net losses of $48,396,000 ($2.70 per share) for the year ended
December 31, 1998 and $4,737,000 ($.41 per share) for the year ended
December 31, 1997. Our total operating expenses were $39,079,000 in 1998 and
$6,865,000 in 1997. Excluding the special charges recorded in the second quarter
of 1998 totaling $25,682,000 which related primarily to the termination of
certain launch and orbit related contracts required when we decided to enhance
our satellite delivery system to include a third in-orbit satellite, we recorded
net losses of $22,714,000 and operating costs of $13,397,000 in 1998.
Legal, consulting and regulatory fees increased to $4,064,000 in 1998 from
$3,236,000 in 1997. The increase in the level of expenditures was primarily the
result of greater consulting expenses due to the accelerated execution of our
business plan. Consulting fees were generated primarily in connection with the
technical aspects of our business plan, such as satellite construction, chip set
design and terrestrial repeater network build-out. The major components of
legal, consulting and regulatory fees in the 1998 period were legal (48%),
consulting (50%) and regulatory (2%), while in the 1997 period the major
components were legal (51%), consulting (44%) and regulatory (5%).
Research and development costs were $22,000 in 1998, compared with $57,000
in 1997. This level of research and development cost is the result of our
completing the majority of these activities in 1994.
Other general and administrative expenses increased to $9,311,000 in 1998
from $3,572,000 in 1997. General and administrative activities have grown as we
continue to expand our management team and the workforce necessary to develop
and commence the broadcast of CD Radio. The major components of other general
and administrative costs in 1998 were salaries and employment related costs
(51%) and rent and occupancy costs (24%), while in the 1997 period the major
components were salaries and employment related costs (57%) and rent and
occupancy costs (11%). The increase in the percentage of the total costs related
to rent and occupancy was due to our taking possession of the premises where our
National Broadcast Studio is being constructed.
S-20
<PAGE>
The remaining portion of other general and administrative costs (25% in 1998 and
32% in 1997) consists of other costs such as insurance, market research, travel,
depreciation and supplies, with no amount exceeding 10% of the total.
Interest and investment income increased to $7,250,000 in 1998 from
$4,074,000 in 1997. The increase was the result of a higher average investment
balance throughout 1998 than 1997. The higher average investment balance was due
to the completion of the sales of stock to both Prime 66 and the Apollo
Investors in 1998 and the unexpended proceeds from our 1997 securities
offerings.
Interest expense, net of capitalized interest, was $14,272,000 in 1998 and
$1,946,000 in 1997. This increase was due to interest expense accruing on our
senior secured discount notes issued in November 1997. Although we recorded a
net loss, we recorded $2,295,000 of income tax expense in 1998, which is related
to our being a 'start-up' company for income tax purposes and the fact that the
interest expense on our senior secured discount notes is deductible only when
paid.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
We recorded net losses of $4,737,000 ($.41 per share) for the year ended
December 31, 1997 and $2,831,000 ($.29 per share) for the year ended
December 31, 1996. Our total operating expenses were $6,865,000 for the year
ended December 31, 1997 and $2,930,000 for the year ended December 31, 1996.
Legal, consulting and regulatory fees increased for the year ended
December 31, 1997 to $3,236,000 from $1,582,000 for the year ended December 31,
1996. These levels of expenditures are the result of increased activity since
winning the auction for our FCC license in April 1997, and in connection with
our public offerings of Common Stock and units consisting of Senior Discount
Notes and warrants to purchase Senior Discount Notes and the exchange offer for
our 5% Preferred Stock. The major components of legal, consulting and regulatory
fees in 1997 were legal (51%), consulting (44%) and regulatory (5%), while in
1996 the major components were legal (48%), consulting (38%) and regulatory
(14%).
Research and development costs were $57,000 for the year ended
December 31, 1997 and $117,000 for the year ended December 31, 1996. We
completed the majority of these activities in 1994.
Other general and administrative expenses increased for the year ended
December 31, 1997 to $3,572,000 from $1,231,000 for the year ended December 31,
1996. General and administrative expenses are expected to continue to increase
as we continue to develop our business. The major components of other general
and administrative costs in 1997 were salaries and employment related costs
(57%) and rent and occupancy costs (11%), while in 1996 the major components
were salaries and employment related costs (50%) and rent and occupancy costs
(22%). The remaining portion of other general and administrative costs (32% in
1997 and 28% in 1996) consists of other costs such as insurance, market
research, travel, depreciation and supplies, with no amount exceeding 10% of the
total.
The increase in interest and investment income to $4,074,000 for the year
ended December 31, 1997, from $112,000 in the year ended December 31, 1996, was
the result of a higher average investment balance during 1997. The investments
on hand were primarily obtained from the debt and equity offerings completed in
1997.
Interest expense increased for the year ended December 31, 1997 to
$1,946,000 from $13,000 for the year ended December 31, 1996. The increase is
the result of the issuance of the units consisting of senior secured discount
notes and warrants to purchase senior secured discount notes in November 1997.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, we had a total of cash, cash equivalents, marketable
securities and restricted investments of $356,028,000 and working capital of
$204,693,000 compared with cash, cash
S-21
<PAGE>
equivalents and marketable securities of $265,623,000 and working capital of
$180,966,000 at December 31, 1998. The increases in the respective balances are
due primarily to the proceeds from the issuance in May 1999 of units consisting
of our senior secured notes and warrants to purchase our common stock. As part
of the issuance of the senior secured notes in the 1999 second quarter, we were
required to place approximately $79.3 million of government securities in a
restricted account to be used only to pay the interest on these notes during
their first three years.
Funding Requirements. We require near-term funding to continue building our
CD Radio system. We believe we can fund our planned operations and the
construction of our satellite system into the fourth quarter of 2000 from the
proceeds of this stock offering, the notes offering and from our working
capital. We estimate that we will require approximately $1,170 million to
develop and commence commercial operations by the end of the fourth quarter of
2000. This amount is higher than our previous estimate and reflects additional
engineering requirements for our terrestrial repeater network, increases in
premiums in the market for satellite launch and in-orbit insurance, costs for
engineering analysis on potential alternative satellite launch platforms and
other increased operating costs. After giving effect to this stock offering and
the notes offering we will have raised, will have access to or will have
identified sources for approximately $1,188 million (which includes sources of
$115 million of debt financing to repay our existing bank credit facility that
must be repaid by the earlier of February 29, 2000 and ten days prior to the
launch of our second satellite), leaving expected excess cash of approximately
$18 million to fund our operations after the fourth quarter of 2000. However, if
Bank of America is unable to arrange a new credit facility for us, we will need
to raise $115 million to refinance the existing credit facility in the first
quarter of 2000 and an additional $88 million to fund our operations through the
end of the fourth quarter of 2000; and moreover, if we are unable to
successfully complete our concurrent stock offering, we will need to raise an
additional $68 million prior to the fourth quarter of 2000 to fund our
operations before the commencement of our CD Radio service. The availability of
this new credit facility, which we expect to draw on to repay amounts
outstanding at maturity under our existing bank credit facility, will be
influenced by a variety of factors, some of which, including the market for
syndicated bank loans generally, are outside of our control. In addition, we
anticipate cash requirements of approximately $150 million to fund our
operations through the first full year of commercial operations. This amount is
higher than our previous estimate and reflects additional engineering design and
development costs and increases in the amount of chip set subsidies for CD Radio
receivers, which are payable in part under our recent agreements with Alpine,
Panasonic and Ford, and costs of revenue sharing with Ford. The amount also
reflects increases in premiums in the market for satellite in-orbit insurance
and other increased operating costs. We expect to finance the remainder of our
funding requirements through the future issuance of debt or equity securities,
or a combination of debt and equity securities.
To build and launch the satellites necessary for the operations of CD Radio
we entered into the Loral Satellite Contract. The Loral Satellite Contract
provides for Loral to construct, launch and deliver three satellites in-orbit
and checked-out, to construct for us a fourth satellite for use as a ground
spare and to become our launch services provider. We are committed to make
aggregate payments of approximately $736 million under the Loral Satellite
Contract, which includes $15 million of long-lead time parts for a fifth
satellite and $3 million for integration analysis of the viability of using the
Sea Launch platform as an alternative launch vehicle for our satellites. As of
August 31, 1999, $376 million of this obligation had been satisfied. Under the
Loral Satellite Contract, with the exception of a payment made to Loral in March
1993, payments are made in installments commencing in April 1997 and will end in
December 2003. Approximately half of these payments are contingent upon Loral
meeting specified milestones in the construction of our satellites.
We also will require funds for working capital, interest on borrowings
(including the notes), acquisition of programming, financing costs and operating
expenses until some time after the commencement of commercial operations of CD
Radio. We expect our interest expense will increase significantly when compared
to our 1998 interest expense as a result of the issuance of our senior secured
notes and the notes; however, our senior discount notes, which represent a
S-22
<PAGE>
substantial portion of our planned indebtedness, will not require cash payments
of interest until June 2003. In addition, a portion of the net proceeds of the
issuance of our senior secured notes was used to purchase a portfolio of U.S.
government securities in an amount sufficient to pay the first six payments of
interest on these notes. In addition, we currently expect to fund interest
payments on the notes through proceeds from the issuance of equity. We cannot
assure you that such issuances will be accomplished on terms advantageous to us,
or at all.
We cannot assure you that we will be able to obtain additional financing on
favorable terms, or at all, or that we will be able to do so in a timely
fashion. The indentures governing our senior secured notes and our senior
secured discount notes and the Tranche A Facility contain, and documents
governing any indebtedness incurred in the future are expected to contain,
provisions limiting our ability to incur additional indebtedness. If additional
financing were not available on a timely basis, we would be required to delay
satellite and/or launch vehicle construction to conserve cash and to fund
continued operations, which would cause delays in the commencement of operations
and increase costs.
The amount and timing of our actual cash requirements will depend upon
numerous factors, including costs associated with the construction and
deployment of our satellite system and terrestrial repeater network, costs
associated with the design and development of chip sets and receivers, the rate
of growth of our business after commencing service, costs of financing and the
possibility of unanticipated costs. We will require additional funds if there
are delays, cost overruns, unanticipated expenses, launch failures, launch
services or satellite system change orders, or any shortfalls in estimated
levels of operating cash flow.
Sources of Funding. To date, we have funded our capital needs through the
issuance of debt and equity securities and borrowings under our term loan
facility. As of June 30, 1999, we had received a total of $441 million in equity
capital, of which $192 million was received in 1997 as a result of the issuance
of 5,400,000 shares of 5% Delayed Convertible Preferred Stock, resulting in net
proceeds of $121 million, and the issuance of 4,955,488 shares of common stock,
resulting in net proceeds of $71 million. In November 1997, we exchanged
1,846,799 shares of our newly issued 10 1/2% Series C Cumulative Convertible
Preferred Stock for all of the outstanding shares of 5% Delayed Convertible
Preferred Stock. On November 2, 1998, we sold an additional 5,000,000 shares of
common stock to Prime 66 resulting in net proceeds of $98 million and on
December 23, 1998, we sold 1,350,000 of 9.2% Series A Junior Cumulative
Convertible Preferred Stock to the Apollo Investors resulting in net proceeds of
$129 million. On December 23, 1998, the Apollo Investors also granted us an
option, which we have exercised, to sell them 650,000 shares of the 9.2% Series
B Junior Cumulative Convertible Preferred Stock for estimated net proceeds of
$63 million. Subject to customary conditions and there not having occurred a
material adverse change to our business, management or financial condition, we
expect to sell these shares to the Apollo Investors shortly after completion of
this offering.
In May 1999, we received net proceeds of approximately $190 million from
the issuance of 200,000 units, each consisting of $1,000 aggregate principal
amount of senior secured notes and three warrants, each to purchase 3.65 shares
of our common stock. We invested approximately $79.3 million of these net
proceeds in a portfolio of U.S. government securities, which we pledged as
security for the payment in full of interest on the senior secured notes through
May 15, 2002. In November 1997, we received net proceeds of $116 million from
the issuance of 12,910 units, each consisting of $20,000 aggregate principal
amount at maturity of senior secured discount notes and a warrant to purchase
additional senior secured discount notes with an aggregate principal amount at
maturity of $3,000. All these warrants were exercised in 1997. The aggregate
value at maturity of the senior secured discount notes is $297 million. The
senior secured discount notes mature on November 15, 2007 and the first cash
interest payment is due in June 2003. The indentures governing the senior
secured notes and the senior secured discount notes contain some limitations on
our ability to incur additional indebtedness. The senior secured notes and the
senior secured discount notes are secured by a pledge of the stock of Satellite
CD Radio Inc., our subsidiary that holds our FCC license.
S-23
<PAGE>
On July 28, 1998, we entered into the Tranche A Facility with a group of
financial institutions (the 'Lenders'), including Bank of America as agent and a
lender, under which the Lenders agreed to provide us a term loan facility in an
aggregate principal amount of up to $115 million (the term loans under the
Tranche A Facility, the 'Tranche A Loans'). The proceeds of the Tranche A Loans
are being used to fund a portion of the progress payments required to be made by
us under the Loral Satellite Contract for the purchase of launch services and to
pay interest, fees and other expenses related to the Tranche A Facility. The
Tranche A Loans are due on the earlier of February 29, 2000 and ten days prior
to the launch of our second satellite. As of June 30, 1999, we had borrowed
$95.5 million under the Tranche A Facility, substantially all of which was used
to make progress payments under the Loral Satellite Contract.
In connection with the Tranche A Facility, Loral agreed with Bank of
America that at maturity of the Tranche A Loans (including maturity as a result
of an acceleration), upon the occurrence of a bankruptcy of CD Radio or upon the
occurrence of an event of default by Loral under its agreement with Bank of
America, Loral will repurchase from the Lenders the Tranche A Loans at a price
equal to the principal amount of the Tranche A Loans plus accrued and unpaid
interest. In exchange for providing this credit support, Loral receives a fee
from us equal to 1.25% per annum of the outstanding amount of the Tranche A
Loans from time to time.
We have also entered into an agreement with Bank of America under which
Bank of America has agreed to attempt to arrange a syndicate of lenders to
provide a second term loan facility for us in the aggregate principal amount of
$225 million. It is anticipated that a portion of the proceeds of these loans
would be used to repay amounts outstanding under the Tranche A Facility and for
other general corporate purposes. Bank of America has not committed to provide
this term loan facility. The availability of these loans when required to repay
amounts outstanding at maturity under the Tranche A Facility will be influenced
by a variety of factors, some of which, including the market for syndicated bank
loans generally, are outside of our control. The closing of this term loan
facility is expected to be conditioned on the satisfaction of specific
significant conditions and there is no assurance that these loans will be
arranged or that the proposed terms of these loans will be acceptable to us. If
we are unable to close this facility, we will seek to repay the Tranche A Loans
from the proceeds of the sale of debt securities, equity securities or a
combination of debt and equity securities.
The Junior Preferred Stock is convertible into shares of common stock at a
price of $30 per share. The Junior Preferred Stock is callable by us beginning
November 15, 2001 if the current market price, as defined in the Certificate of
Designation of the Junior Preferred Stock, of our common stock exceeds $60 per
share for a period of 20 consecutive trading days, and in all events will be
callable beginning November 15, 2003 at a price of 100% and must be redeemed by
us on November 15, 2011. Dividends on the Junior Preferred Stock are
payable-in-kind or cash annually, at our option. Holders of the Junior Preferred
Stock have the right to vote, on an as-converted basis, on matters in which the
holders of our common stock have the right to vote.
Loral has agreed to defer a total of $50 million of the payments under the
Loral Satellite Contract originally scheduled for payment in 1999. These
deferred amounts bear interest at 10% per annum and all interest on these
deferred amounts will accrue until December 2001, at which time interest will be
payable quarterly in cash. The principal amounts of the deferred payments under
the Loral Satellite Contract are required to be paid in six installments between
June 2002 and December 2003. As collateral security for these deferred payments,
we have agreed to grant Loral a security interest in our terrestrial repeater
network. If there is a satellite or launch failure, we will be required to pay
Loral the deferred amount for the affected satellite no later than 120 days
after the date of the failure. If we elect to put one of our first three
satellites into ground storage, rather than having it shipped to the launch
site, the deferred amount for that satellite will become due within 60 days of
this election.
OTHER MATTERS -- THE YEAR 2000 ISSUE
The Year 2000 Issue will test the capability of business processes to
function correctly. We have undertaken an effort to identify and mitigate The
Year 2000 Issue in our information
S-24
<PAGE>
systems, product, suppliers and facilities. Our approach to The Year 2000 Issue
can be separated into four phases: (1) define/measure -- identify and inventory
possible sources of Year 2000 Issues; (2) analyze -- determine the nature and
extent of Year 2000 Issues and develop project plans to address those issues;
(3) improve -- execute project plans and perform a majority of the testing; and
(4) control -- complete testing, continue monitoring readiness and complete
necessary contingency plans. The first three phases of the program have been
completed for a substantial majority of our mission-critical activities.
Management plans to have nearly all significant information systems and
facilities through the control phase of the program by late-1999.
We have also communicated with our significant vendors and suppliers to
determine the extent to which we are vulnerable to the failure of these parties
to remedy Year 2000 Issues. We can give no assurance that failure to address the
Year 2000 Issues by third parties on whom our systems and business processes
rely would not have a material adverse effect on our operations or financial
condition.
The total Year 2000 Issue remediation expenditures are expected to be
approximately $100,000 of which 50% was spent by June 30, 1999. Substantially
all of the remainder is expected to be spent in 1999. The activities involved in
the Year 2000 effort necessarily involve estimates and projections of activities
and resources that will be required in the future. These estimates and
projections could change as work progresses.
S-25
<PAGE>
BUSINESS
We are building a digital quality radio service that will broadcast up to
100 channels directly from satellites to vehicles. CD Radio will be broadcast
throughout the continental United States, over a frequency band, the 'S-band,'
that will augment traditional AM and FM radio bands. We hold one of only two
licenses issued by the FCC to build, launch and operate a national satellite
radio broadcast system. Under our FCC license, we have the exclusive use of a
12.5 MHz portion of the S-band for this purpose. Our service, which will be
primarily for motorists, will offer 50 channels of commercial-free, digital
quality music programming and up to 50 channels of news, sports, talk and
entertainment programming. We currently expect to commence CD Radio broadcasts
at the end of the fourth quarter of 2000, at an anticipated subscription price
of $9.95 per month. We have entered into a contract with Loral for the
construction, launch and in-orbit delivery of three satellites beginning in
January 2000.
As an entertainment company, we intend to design and originate programming
on each of our 50 commercial-free music channels. Each channel will be operated
as a separate radio station, with a distinct format. Some of the music channels
will offer continuous music while others will have program hosts, depending on
the type of music programming. CD Radio will offer the following range of music
categories:
Symphonic
Chamber Music
Opera
Top of the Charts
50's Hits
60's Hits
70's Hits
80's Hits
90's Hits
Soft Rock
Love Songs
Singers & Songs
Beautiful Instruments
Broadway's Best
Big Band/Swing
Classic Jazz
Contemporary Jazz
NAC Jazz
New Age
Soul Ballads
Contemporary R&B
Classic Soul Hits
R&B Oldies
Rap/Hip Hop
Dance
Tropical
Latin Jazz
Boleros
Latin Contemporary
Merengue
Cumbia
Mexicana
TexMex
Rock en Espanol
Country Hits
Modern Country
Classic Country
Folk Rock
Alternative Rock I
Alternative Rock II
Classic Rock I
Classic Rock II
Album Rock
Hard Rock/Metal
Blues
Reggae
World Beat
Gospel
Contemporary Christian
Children's Entertainment
Programming on our non-music channels will be provided by third parties,
and to date we have entered into programming agreements with content providers
for 25 of these channels, including NPR, BBC, Bloomberg News Radio, C-SPAN and
Sports Byline USA. A majority of our non-music channels will contain
advertising, which will augment our subscription revenue. These channels will
include news and talk shows and special interest programming directed to a
diverse range of groups, including sports and outdoor enthusiasts, Hispanic
listeners and truck drivers.
Our music and non-music channels will be broadcast from our National
Broadcast Studio in Rockefeller Center in New York City. The National Broadcast
Studio will contain our corporate headquarters, our music library, facilities
for programming origination, programming personnel and program hosts, and
facilities to transmit programming to our orbiting satellites, to activate or
deactivate service to subscribers and to perform the tracking, telemetry and
control of the satellites.
On June 11, 1999, we entered into an agreement with Ford Motor Company
which anticipates Ford manufacturing, marketing and selling vehicles that
include receivers capable of receiving the CD Radio broadcasts. As part of this
exclusive agreement, Ford will be entitled to participate in a
S-26
<PAGE>
portion of the revenues derived by us from new Ford vehicles equipped to receive
CD Radio broadcasts. In addition, we will reimburse Ford for specific costs of
equipping these Ford vehicles to receive CD Radio broadcasts and we have granted
Ford warrants to purchase up to 4,000,000 shares of our common stock at an
exercise price of $30 per share. Ford may exercise these warrants based upon the
number of Ford vehicles equipped to receive CD Radio broadcasts that Ford elects
to manufacture, and these warrants are fully exercisable upon 4,000,000 of these
vehicles being manufactured. Please refer to the section of the related
prospectus entitled 'Description of Warrants -- The Ford Warrant' for further
information regarding the Ford warrants.
On September 23, 1999, we and Ford amended our agreement to extend the term
by one year and to enter into a cooperative advertising arrangement. As part of
the cooperative advertising arrangement, we have agreed to reimburse Ford for
portions of its direct, out-of-pocket, costs of advertising or media that
promote or mention CD Radio in association with Ford vehicles. Our obligation to
reimburse Ford for this cooperative advertising is limited to $3 million per
year during our first five years of commercial operations. In connection with
this amendment, Ford has placed an order for up to $20 million of our common
stock being sold in the concurrent stock offering.
We have entered into an agreement with Lucent for the development and
manufacture of a chip set that represents the essential element of consumer
electronics devices which are capable of receiving CD Radio.
CD Radio Inc. was incorporated in the State of Delaware as Satellite
CD Radio, Inc. on May 17, 1990. On December 7, 1992, we changed our name to
CD Radio Inc., and we formed a wholly owned subsidiary, Satellite CD Radio,
Inc., that is the holder of our FCC license. Our executive offices are located
at 1221 Avenue of the Americas, New York, New York 10020, our telephone number
is (212) 584-5100 and our internet address is cdradio.com. The information on
our website is not part of this prospectus.
THE CD RADIO SERVICE
CD Radio will offer motorists: (1) a wide choice of finely focused music
and non-music formats; (2) nearly seamless signal coverage throughout the
continental United States; and (3) commercial-free music programming.
Commercial-Free Music Programming. CD Radio will provide 50 channels of
commercial-free music programming. Our market research indicates that a
principal complaint of radio listeners concerning conventional broadcast radio
is the frequency of commercials. Because CD Radio, unlike commercial AM and FM
stations, will be a subscription service, our music channels will not contain
commercials.
Wide Choice Of Programming. CD Radio will offer subscribers a broad range
of programming formats and significant depth within each format. Each of our 50
music channels will have a distinctive format, such as opera, reggae, classic
jazz and children's entertainment, intended to cater to specific subscriber
tastes. In most markets, radio broadcasters target their programming to broad
audience segments and therefore offer limited formats. Even in the largest
metropolitan markets many of our planned formats are unavailable. Additionally,
we will provide news, sports and talk programming that is generally not
available on conventional radio.
'Seamless' Signal Coverage. CD Radio will be available throughout the
continental United States, enabling listeners almost always to be within its
broadcast range. We expect that our nearly seamless signal will appeal to
motorists who frequently travel long distances, including truck drivers and
recreational vehicle owners, as well as commuters and others who outdrive the
range of their preferred FM radio broadcasts. In addition, we expect that our
broadcasts will appeal to the 45 million consumers who live in areas that
currently receive only a small number of FM stations.
Our research indicates that there is a significant market for music and
other radio programming such as news, talk and sports delivered through advanced
radio technology. While television technology has advanced steadily -- from
black and white to color, from broadcast to cable and satellite, and from
ordinary to high-definition television -- the last major advance in radio
technology was the introduction of FM broadcasts.
S-27
<PAGE>
CD Radio is primarily a service for motorists. The Yankee Group, a market
research organization, estimates that there will be approximately 200 million
registered private motor vehicles in the United States by the end of this year.
CD Radio will initially target a number of demographic groups among the drivers
of these vehicles, including 100 million commuters, 34 million of whom spend
over one hour commuting daily; 45 million Americans who live in markets served
by five or fewer radio stations; three million truck drivers; three million
owners of recreational vehicles; and approximately 30 million persons of
Hispanic origin.
We believe there will be significant consumer demand for CD Radio. Market
research conducted for us by The Yankee Group shows that radio listeners today
are substantially dissatisfied with both AM and FM radio because of frequent
commercial interruptions, lack of variety in programming and loss of signal
strength. CD Radio's commercial-free music, wide variety of formats and nearly
seamless national coverage have been designed to address these key disadvantages
of existing commercial radio.
According to Arbitron, in 1996, despite the fact that almost all vehicles
contained either a cassette or compact disc player, 87% of automobile commuters
listened to the radio an average of 50 minutes a day while commuting. According
to the Radio Advertising Bureau, each week radio reaches approximately 95% of
all Americans over the age of 12, with the average listener spending more than
three hours per weekday and more than five hours per weekend listening to the
radio. More than 40% of all radio listening is done in cars. In addition, in
1998, approximately 79% of total radio listening was to FM stations, which
primarily provides music programming, as compared with AM stations which devote
a greater proportion of their programming to talk and news.
We believe that our ability to offer a wide variety of musical and
non-musical formats simultaneously throughout the continental United States will
enable us to tap significant unmet consumer demand for specialized programming.
The economics of the existing advertiser supported radio industry dictate that
conventional radio stations generally program for the greatest potential
audience. Even in the largest metropolitan areas, station formats are limited.
Nearly half of all commercial radio stations in the United States offer one of
only three formats: country, adult contemporary and news/talk, and the next
three most prevalent formats account for another 30% of all commercial radio
stations. Although niche music categories such as classical, jazz, rap, gospel,
oldies, soundtracks, new age music, children's programming and others accounted
for approximately 33% of sales of recorded music in 1998, these formats
generally are unavailable on existing radio stations in many markets. Even in
New York City, the nation's largest radio market, there are no radio stations
devoted solely to such programming as opera, blues, chamber music, soundtracks,
reggae and many others. CD Radio's wide choice of formats is expected to appeal
to the large number of currently underserved listeners. Furthermore, CD Radio's
ability to offer a number of channels devoted to each genre will enable
subscribers to listen to a wider range of music within their preferred format.
The limited coverage area of conventional radio broadcasting means that
listeners often travel beyond the range of any single station. Unlike
conventional FM stations, which have an average range of only approximately 30
miles before reception fades, CD Radio's system is designed to cover the entire
continental United States, enabling listeners to enjoy virtually seamless
coverage. Our ability to broadcast nationwide will also allow us to serve
currently underserved radio markets.
We also believe that CD Radio will have a competitive advantage over
conventional radio stations because our music channels will be commercial-free.
In contrast, conventional radio stations interrupt their broadcasts with up to
18 minutes of commercials in every hour of music programming, and most stations
also frequently interrupt programming with news, promotional announcements,
public service announcements and miscellaneous information. We believe that
consumers dislike frequent commercial interruptions and that 'station surfing'
to avoid them is common.
S-28
<PAGE>
PROGRAMMING
We intend to offer 50 channels of commercial-free, all-music programming
and up to 50 additional channels of other formats, such as all-news, all-sports
and all-talk programming. Each music channel will have a distinctive format,
intended to cater to specific subscriber tastes. We believe that 50 music
channels will enable us to 'superserve' our subscribers with a greater range of
choice of content within their preferred format than is currently offered by
terrestrial radio, even in the most widely broadcast formats. We expect that the
initial subscription fee for CD Radio, which will entitle subscribers to receive
all CD Radio channels, will be $9.95 per month.
We have recruited 12 full-time and 13 consulting basis program managers
from the recording, broadcasting and entertainment industries to manage the
development of daily programming for each CD Radio music channel and intend to
recruit additional program managers. To be accessible to these industries, we
are building our National Broadcast Studio in Rockefeller Center in New York
City. Program managers also will coordinate our continuing market research to
measure audience satisfaction, refine channel definitions and themes and select
program hosts for those channels that will have hosts.
Music programming will be selected from our music library. We intend to
create an extensive music library which will consist of a deep range of recorded
music in each genre broadcast. We have begun to acquire recordings for our music
library. Through September 13, 1999, we had acquired approximately 750,000
titles across a broad range of music genres. We expect that our music library
will consist of approximately 2,000,000 titles when we commence commercial
broadcasts of CD Radio. We expect to update our music library with new
recordings as they are released and, in some cases, we will seek to acquire
recordings that are no longer commercially available.
In addition to our music channels, we expect to offer up to 50 channels of
news, sports and talk programming, most of which will include commercial
advertising. We generally do not intend to produce programming for our non-music
channels, and will obtain this programming from various third party content
providers. To date, we have entered into agreements for a total of 25 channels
with content providers including NPR, BBC, Bloomberg News Radio, C-SPAN, Sports
Byline USA, National Public Radio, Public Radio International, Classic Radio,
Hispanic Radio Network, World Radio Network, Wisdom Channel, Speedvision Radio
and Outdoor Life Radio.
In connection with our music programming, we will be required to negotiate
and enter into royalty arrangements with performing rights societies, such as
the American Society of Composers, Authors and Publishers ('ASCAP'), Broadcast
Music, Inc. ('BMI') and SESAC, Inc. ('SESAC'). These organizations collect
royalties and distribute them to songwriters and music publishers. Copyright
users negotiate a fee with these organizations based on a percentage of
advertising and/or subscription revenues. If the parties cannot reach agreement
with ASCAP or BMI, special judicial rate setting procedures are available under
antitrust consent decrees that govern these organizations. SESAC is not bound by
a consent decree or a special judicial rate setting mechanism. Broadcasters
currently pay a combined total of 4% of their revenues to the music performing
rights societies. We also will be required to negotiate similar arrangements
with the owners of the copyrights in sound recordings under the Digital
Performance Right in Sound Recordings Act of 1995 (the 'Digital Recordings
Act'). The determination of some of the royalty arrangements with the owners of
sound recording copyrights under the Digital Recordings Act were previously
subject to arbitration proceedings. In 1998, the Copyright Office reviewed the
results of this arbitration and set the royalty rate at 6.5% of the licensee's
'gross revenues resulting from residential services in the United States'
including subscription fees, advertising and time share revenues. We believe
that we will be able to negotiate royalty arrangements with the music performing
rights organizations and the owners of sound recording copyrights, but we cannot
assure you as to the terms of the royalty arrangements ultimately negotiated or
established by arbitration or judicial rate setting.
S-29
<PAGE>
MARKETING AND DISTRIBUTION
We plan to offer a high quality broadcast service with targeted music
formats, nearly seamless signal coverage throughout the continental United
States, commercial-free music programming and digital quality fidelity. Our
marketing strategy for CD Radio has three interrelated components: (1) creating
consumer awareness of CD Radio, (2) generating subscriptions to CD Radio and (3)
generating purchases of consumer electronic devices capable of receiving
CD Radio broadcasts.
We believe that the introduction of CD Radio will have high news value,
which we expect will result in significant national and local publicity before
and during the initial launch of the service. In addition, we plan to engage in
extensive marketing, advertising and promotional activities to create consumer
awareness of CD Radio. This includes an ongoing major advertising campaign
funded principally by us, together with expected manufacturer and retailer
cooperative advertising. A major national umbrella campaign will utilize a full
mix of media, including network and cable television, radio, print and
billboard.
We intend to focus our initial efforts on a number of demographic groups
that we believe represent potential target markets for CD Radio, including
commuters, niche music listeners, Hispanic listeners, sports enthusiasts, truck
drivers, recreational vehicle owners and consumers in areas with sparse radio
coverage. We also intend to aggressively target early adopters of new
technologies, who we believe are likely to have a high level of interest in
CD Radio.
Commuters. Of the more than 100 million commuters, we have identified 34
million as highly addressable by virtue of their commute times averaging over
one hour daily. To reach these commuters, we plan to purchase radio advertising
spots on stations with frequent traffic reports, purchase outdoor billboard
advertising on long commute roads and place inserts in gasoline credit card
bills.
Niche Music Listeners. Niche music categories, such as classical, jazz,
rap, gospel, soundtracks, oldies and children's programming, constitute
approximately 30% of the market for recorded music sales. To reach niche music
listeners, we intend to work with the recording industry to include print
material about CD Radio inside niche music compact disc packaging, place print
advertising in specialty music magazines targeted to niche music listeners and
members of fan clubs, conduct direct mailings to specialized music mailing lists
of record clubs and sponsor and advertise at certain music events.
Hispanic Market. Currently there are approximately 30 million
Spanish-speaking Americans, many of whom have limited access to Spanish language
radio, and this population group is growing rapidly and is expected to reach 36
million by 2005. We intend to broadcast a number of music and non-music channels
that will cater to the Hispanic market. We plan to purchase local television
spots on Spanish speaking channels and place advertising in national Spanish
language magazines and local Spanish language newspapers.
Sports Enthusiasts. Many fans of various sports are unable to receive
broadcasts of interest to them because events are broadcast only within limited
regional areas. We intend to broadcast a number of channels containing this
sports programming. We plan to purchase advertising on national and regional
cable television sports channels, in sports magazines and in the sports sections
of newspapers.
Truck Drivers. According to the U.S. Department of Transportation, there
are approximately three million professional truck drivers in the United States,
of whom approximately 1.1 million are long-distance haulers. We intend to place
sampling displays at truck stops and to advertise in publications and on
Internet sites which cater to truck drivers.
Recreational Vehicle Owners. There are approximately three million
recreational vehicles in the United States. We plan to advertise in magazines
targeted to recreational vehicle enthusiasts, conduct direct mailings targeted
to these individuals and place sampling displays at recreational vehicle
dealerships.
Sparse Radio Zones. More than 45 million people aged 12 and over live in
areas with such limited radio station coverage that the areas are not monitored
by Arbitron. We believe that of
S-30
<PAGE>
these people, approximately 22 million people receive five or fewer FM stations,
1.6 million receive only one FM station and at least one million people receive
no FM stations. To reach these consumers, we plan to utilize local newspaper and
target direct mailings to music enthusiasts in these areas.
We expect that FM modulated receivers and three-band receivers will be sold
through electronics superstores as well as independent autosound retailers and
that radio cards will be sold through electronics superstores, mass merchants
and direct marketing channels, such as the Internet.
SUBSCRIPTION AND BILLING
We intend to contract out our customer care functions to a national
customer service and telemarketing provider. Operators at our customer care
center will have the ability to access our separate billing services center for
various functions, including customer activation, billing inquiries, program
service changes and address changes. When appropriate, operators will also refer
technical problems to either a CD Radio help desk, or to the appropriate
equipment manufacturer. We intend to automate customer care functions where
appropriate, either through interactive voice response technology (IVR), or
through our Web site. We expect to pay our customer service provider based on
transaction and call volume.
We also intend to contract out our customer billing and activation function
to a national billing services company. This billing center will receive
requests from our separate customer care center for actions such as radio
activations, deactivations, program service changes, and billing inquiries. This
billing center will handle all other customer processing operations, including
remittance processing, collections, interfacing to credit/debit card clearing
houses, and fulfillment processing. We expect that a large percentage of our
subscribers will pay using a credit card. However, our customer billing system
will also have the capability to do direct invoicing. There will be a modest
one-time activation fee to cover subscriber sign-up costs. The billing software
application and database will be customized to handle our unique requirements,
including interfacing and exchanging of information with automobile
manufacturers, automobile dealers and consumer electronic retailers, and
employing special techniques to address the challenge of activating and
deactivating receivers. We expect to pay our billing services company based on
transaction volumes.
THE CD RADIO DELIVERY SYSTEM
The CD Radio satellite system is designed to provide nearly seamless signal
coverage throughout the continental United States. This means that listeners
will almost always be within the broadcast range of CD Radio, unlike current FM
radio broadcasts, which have an average range of only approximately 30 miles.
The CD Radio system is designed to provide clear reception in most areas despite
variations in terrain, buildings and other obstructions. The system is designed
to enable motorists to receive CD Radio in all outdoor locations where the
vehicle has an unobstructed line-of-sight with one of our satellites or is
within range of one of our terrestrial repeating transmitters.
The portion of the S-band located between 2320 MHz and 2345 MHz has been
allocated by the FCC exclusively for national satellite radio broadcasts, and
will augment traditional AM and FM radio bands. This portion of the spectrum was
selected because there are virtually no other users of this frequency band in
the United States, thus minimizing potential signal interference. In addition,
this frequency band is relatively immune to weather related attenuation, which
is not the case with higher frequencies.
We plan to use 12.5 MHz of bandwidth in the 7060-7072.5 MHz band (or some
other suitable frequency) for uplink transmissions to our satellites. Downlink
transmission from the satellites to subscribers' will use 12.5 MHz of bandwidth
in the 2320.0-2332.5 MHz frequency band.
In May 1998, we expanded our system from 50 planned broadcast channels to
up to 100 channels. As part of that expansion, we announced our plan to change
the orbital location of our
S-31
<PAGE>
satellites from geostationary orbits over the equator to inclined elliptical
orbits. This modification will allow our satellites to maximize the time spent
over the continental United States, which will permit us to fully utilize the
bandwidth allocated to us by the FCC. Each satellite will travel in a figure
eight pattern extending above and below the equator, and will spend
approximately 16 hours per day north of the equator. A satellite north of the
equator will serve the United States at a better elevation angle than a
geostationary satellite over the equator. At any given time, two of our three
satellites will operate from the portion of the orbit north of the equator while
the third satellite will not broadcast as it traverses the portion of the orbit
south of the equator.
CD Radio is designed to broadcast the same signals from two of the three
satellites. This design involves new applications of technology that have not
been deployed and we cannot assure you that the CD Radio system will work as
planned.
The CD Radio delivery system will consist of three principal components:
(1) the satellites; (2) the receivers; and (3) the National Broadcast Studio.
THE SATELLITES
Satellite Design. Our satellites are of the Loral FS-1300 model series.
This family of satellites has a history of reliability with a total of 275 years
in-orbit operation time. The satellites are designed to have a useful life of
approximately 15 years. To ensure the durability of our satellites, we have
selected components and subsystems that have a demonstrated track record on
operational FS-1300 satellites, such as N-STAR, INTELSAT VII and TELSTAR. In
addition, a full series of ground tests will be performed on each of our
satellites before launch to detect assembly defects and avoid premature
satellite failure.
Our satellites will utilize a three-axis stabilized design. Each satellite
will contain an active attitude and position control subsystem; a telemetry,
command and ranging subsystem; a thermal control subsystem and an electrical
power subsystem. Power will be supplied by silicon solar arrays and, during
eclipses, by nickel-hydrogen batteries. Each satellite after deployment will be
approximately 81 feet long, 19 feet wide and 17 feet tall.
Our satellites will incorporate a design which will act essentially as a
'bent pipe,' relaying received signals directly to the ground. Our satellites
will not contain on-board processors. All of our processing operations will be
on the ground where they are accessible for maintenance and continuing
technological upgrade without the need to launch replacement satellites.
High Elevation Angles. We plan to place our satellites in orbits that
extend over North America to provide very high signal elevation angles and
thereby mitigate service interruptions which can result from signal blockage and
fading. Each of our two transmitting satellites will broadcast the same signal.
Memory Buffer. Our transmission design incorporates the use of a memory
buffer chip contained within the receiver. Each memory buffer chip is designed
to store signals and to mitigate service interruptions which can result from
signal blockage and fading. As with any wireless broadcast service, we expect to
experience occasional 'dead zones' where the service from our satellites will be
interrupted by nearby tall buildings, elevations in topography, tree clusters,
highway overpasses and similar obstructions; however, in most of these places,
we expect that subscribers will continue to receive a signal from their
receiver's memory buffer.
Terrestrial Repeaters. In some areas with high concentrations of tall
buildings, such as urban cores and in tunnels, signals from our satellites will
be blocked and reception will be adversely affected. In these urban areas, we
plan to install terrestrial repeating transmitters to rebroadcast our satellite
signals, increasing the availability of service. The FCC has not yet established
rules governing these terrestrial repeaters, and we cannot predict the outcome
of the FCC's current rulemaking on this subject. We also will need to obtain the
rights to use towers or the roofs of some structures where the repeaters will be
installed. We cannot assure you that we can obtain these tower or roof rights on
acceptable terms or in all appropriate locations.
S-32
<PAGE>
During 1998, we completed the construction and testing of our terrestrial
repeater network in San Francisco on an experimental basis. During 1999 and
2000, we expect to execute agreements for site acquisition, site design and site
construction services for the remainder of our terrestrial repeaters, acquire
all necessary sites and complete construction at all of these sites. In
addition, in 1999 we expect to purchase the digital broadcast equipment
necessary to operate our terrestrial repeater network.
Satellite Construction and Launch Services. In March 2, 1993, we entered
into a contract with Loral to build three satellites, two of which we intended
to launch and one of which we intended to keep in reserve as a spare. Under the
contract, we had an option to order a fourth satellite on preset price and
delivery terms. We notified Loral of the exercise of this option in March 1998.
On July 28, 1998, as a result of an evaluation of the advantages of a
three-satellite orbital configuration, we and Loral entered into the Loral
Satellite Contract. Under the Loral Satellite Contract, Loral has agreed to
construct, launch and deliver our three satellites, in-orbit and checked-out, to
construct for us a fourth satellite for use as a ground spare and to become our
launch services provider. Our four satellites are currently being tested or
under construction. Our first satellite has been substantially completed and is
being tested. All of the components of our second satellite are either
substantially complete or undergoing final testing before integration. All of
the subsystems for our third and fourth satellites are also under construction.
Each of our satellites is scheduled to be launched on Proton launch
vehicles. Loral has scheduled the launch of our first satellite for January
2000, the launch of our second satellite in March 2000, the launch of our third
satellite by May 2000 and has agreed to deliver our fourth satellite to a
designated ground storage site by August 2000. Loral expects to deliver all
three of our satellites in-orbit and checked-out by June 30, 2000. We cannot
assure you that Loral will be able to meet the above schedule. It is a default
under the Loral Satellite Contract if (1) we fail to maintain a minimum net
worth, (2) we fail to have sufficient funds or committed financing to pay our
obligations on a timely basis or (3) there occurs an event of default under our
existing credit agreement with Bank of America and other lenders.
Title to our first, second and third satellites will pass to us at the time
these satellites are delivered to us in-orbit and checked out. Risk of loss for
our first, second and third satellites will pass to us at the time of launch.
Title and risk of loss for our fourth satellite will pass to us at the time this
satellite is shipped to the ground storage site designated by us. Each satellite
is warranted to be in accordance with the performance specifications contained
in the Loral Satellite Contract and free from defects in materials and
workmanship. Loral's warranties will expire at the time of launch or, in the
case of our fourth satellite, two years from the date of delivery to the ground
storage site. If there is a delay in the construction of the satellites that is
caused by us, the Loral Satellite Contract provides that the terms of the
contract will be equitably adjusted.
Following the launch of each satellite, Loral will conduct an in-orbit
performance verification. If this testing shows that a satellite is not meeting
the satellite performance specifications contained in the Loral Satellite
Contract, we and Loral have agreed to negotiate an equitable reduction in the
final payment to be made by us for the affected satellite.
Satellite launches have significant risks, including destruction or damage
of the satellite during launch or failure to achieve proper orbital placement.
Although past experience is not necessarily indicative of future performance,
the Proton family of Russian-built launch vehicles has a 92% launch success rate
based on its last 50 launches. There is no assurance that the launches of our
satellites will be successful. Satellites also may fail to achieve a proper
orbit in some instances or be damaged in space. Loral will not bear the risk of
loss for either a satellite or launch vehicle failure. However, Loral will
provide a free launch if there is a failure of the first Proton launch vehicle
which is used to launch one of our satellites. In that event, we would attempt
to launch the spare satellite that we are having constructed. See 'Risk
Factors -- We Are Dependent Upon Loral to Build and Launch Our Satellites' and
' -- Satellite Launches Have Significant Risks' in the related prospectus.
S-33
<PAGE>
We are relying upon Loral to arrange for the timely launch of our
satellites. Failure by Loral to arrange to launch the satellites in a timely
manner could materially adversely affect our business. Loral will not be liable
for indirect or consequential damages or lost revenues or profits resulting from
late delivery or other defaults. If Loral fails to deliver the three satellites
in-orbit and checked out by July 31, 2000 or fails to deliver the fourth
satellite to its storage site by September 30, 2000, it may be liable for
specific late delivery penalties. We cannot assure you that these remedies will
adequately mitigate any damage to our business caused by launch delays.
After reaching agreement with Loral to provide launch services, we
terminated our prior launch services agreement with Arianespace S.A.
('Arianespace') and terminated the related vendor financing with a subsidiary of
Arianespace. As a result of these terminations, we incurred a liability of
approximately $18 million. We expensed this item, together with approximately $7
million of related capitalized and other costs, in the second quarter of 1998.
Risk Management and Insurance. Three custom-designed, fully dedicated
satellites are required to broadcast all 100 planned channels of CD Radio. Our
agreement with Loral includes a free relaunch if there is a failure of the first
Proton launch vehicle used to launch one of our satellites. We intend to insure
against other contingencies, including a failure during launch caused by factors
other than the launch vehicle and failure of launch vehicles other than the
first Proton. If we are required to launch our spare satellite due to a launch
failure, our operational timetable could be delayed. The launch or in-orbit
failure of two satellites would require us to arrange for additional satellites
to be built and could delay the commencement or continuation of our operations
by at least 16 months. See 'Risk Factors -- We Are Dependent Upon Loral to Build
and Launch Our Satellites' and ' -- Satellite Launches Have Significant Risks'
in the related prospectus.
Once properly deployed and operational, the historical risk of premature
total satellite failure has been less than 1% for U.S. geosynchronous commercial
communication satellites. Before the launch of our first satellite, we intend to
purchase insurance covering launch risks and in-orbit failure during the first
two years of operation for each of our satellites. Before the expiration of this
insurance, we intend to evaluate the need for in-orbit insurance for the
remainder of the estimated useful life of each satellite. After we have launched
our satellites and begun to generate revenues, we will evaluate the need for
business interruption insurance.
Satellites are designed to minimize the adverse effects of transmission
component failure through the incorporation of redundant components which
activate automatically or by ground command upon failure. If multiple component
failures occur, and the supply of redundant components is exhausted, the
satellite generally will continue to operate, but at reduced capacity. In that
event, signal quality may be preserved by reducing the number of channels
broadcast until a replacement satellite can be launched. Alternatively, the
number of broadcast channels may be preserved by reducing the signal quality
until a replacement satellite can be launched.
THE RECEIVERS
Consumers purchasing new vehicles will be able to receive CD Radio through
a new generation of three-band radios installed by Ford or another automotive
manufacturer. In addition, consumers will be able to receive CD Radio by
installing specially designed radio receivers in their existing vehicles. The
market for new radio receivers installed in existing vehicles (which is commonly
referred to as the 'aftermarket') is approximately 7 to 8 million units
annually. In the automotive aftermarket, we expect that CD Radio subscribers
will initially have the choice of one of three different receiving devices for
their cars -- an FM modulated receiver, a three-band receiver and a radio card.
These devices, along with CD Radio satellite antennas, are expected to be
manufactured and distributed by a number of consumer electronics manufacturers.
To date, we have entered into agreements with Delco, Recoton, Alpine and
Panasonic to design and develop CD Radio receivers. All CD Radio receivers will
have a visual display that will indicate the channel and format selected, as
well as the title, recording artist and album title of the musical selection
being played. Although we do not intend to manufacture or distribute FM
modulated receivers, three-band receivers, radio cards or antennas, in the early
years of our service their
S-34
<PAGE>
availability will be critical to us because they will be the only means by which
to receive CD Radio.
These three CD Radio receivers will offer customers a range of options in
price, ease-of-installation and quality.
FM Modulated Receivers. The CD Radio FM modulated receiver will be usable
in all vehicles which have an FM radio, or approximately 95% of all U.S.
vehicles. Each FM modulated receiver will operate with a device that will be
approximately the size of a 35mm camera, and will be mounted either in the
vehicle's trunk, behind the dashboard or under a seat. Each FM modulated
receiver will interface with a vehicle's existing radio through the FM antenna
input. The CD Radio data display, as well as the controls for changing channels,
will be contained in a small remote control which will either be wired or
wireless. We expect the retail price of this FM modulated receiver, with a
hard-wired satellite antenna and professional installation, will be
approximately $299. We anticipate that FM modulated receivers will be sold
through electronics superstores as well as independent autosound retailers.
FM modulation technology is widely used in the autosound industry for the
integration of automobile compact disc changers, which typically interface with
the player unit through the FM antenna input and, like the CD Radio FM modulated
receiver, are controlled through a remote control. Approximately 700,000 FM
modulated compact disc changers were sold in the United States in 1998.
Three-Band Receivers. To address consumers who replace their vehicle's
sound system, we expect there will be available a receiver capable of receiving
AM, FM and CD Radio broadcasts. In appearance, this three-band receiver will be
nearly identical to existing aftermarket car stereos and will permit the user to
listen to AM, FM or CD Radio with the push of a button. Like existing
conventional radios, a number of these three-band receivers may also incorporate
cassette or compact disc players. The receiver apparatus will include a
'CD Radio Ready' head-unit, which will accept the direct output of the CD Radio
outboard receiver device. We expect the retail price of these CD Radio-ready
receivers, including the receiver device, antenna and professional installation,
will be approximately $150 more than similar receivers that are not capable of
receiving CD Radio broadcasts. We anticipate that three-band receivers,
including the head unit and the receiver device, will be sold through electronic
superstores as well as independent autosound retailers. Our long-term objective
is to promote the adoption of three-band receivers as standard equipment in all
automobiles sold in the United States.
Radio Cards. CD Radio's wireless adapter, or radio card, will not require
professional installation and will be usable by all vehicles in the United
States equipped with a cassette player, which represents approximately 65% of
all vehicles on the road. Each radio card will include two components -- the
radio card adapter, which will insert into existing cassette slots, and a
wireless version of the CD Radio satellite antenna. We expect the retail price
of the radio card, including the wireless satellite antenna, will be
approximately $199. The radio card will be sold though electronics superstores,
mass merchant type stores and direct marketing channels, such as the Internet.
Lucent Agreement. On April 28, 1998, we entered into an agreement with
Lucent to design the overall architecture of the CD Radio system and to develop
and manufacture a custom designed chip set for use in CD Radio receivers and, on
February 2, 1999, we amended and restated this agreement. We have agreed to pay
Lucent the cost of the development work related to the chip sets, currently
estimated to be approximately $27 million. Approximately half of the expected
payments to Lucent are dependent upon satisfactory completion of designated
development milestones. Lucent has completed design of the system architecture
and delivered the chip set specification on schedule at the end of August.
However, we cannot assure you that Lucent will be able to deliver chip sets
within the time frame described in our agreement. In addition, the cost to us of
the chip set development work could exceed $27 million.
Lucent has agreed to repay all the costs of the chip set development work,
through discounted chip set prices, after commercial production of the chip set
has begun.
S-35
<PAGE>
Delco Agreement. On March 29, 1999, we entered into an agreement with Delco
to design, develop and manufacture three-band receivers (including the related
receiver device) and satellite antennas for sale to major automotive
manufacturers. Delco is the world's largest producer of audio systems for
original automotive equipment and is a leader in mobile communications
technology. We have agreed to pay Delco, when specified development milestones
are completed, specific costs relating to designing and manufacturing prototypes
of this three-band receiver and antenna. Delco has agreed to use commercially
reasonable efforts to complete the design and development work and have
three-band receivers and antennas available for sale to automobile manufacturers
by March 2001. We cannot assure you that Delco will be able to design and
develop these three-band receivers and antennas. In addition, although we expect
that Delco will manufacture and sell substantial quantities of three-band
receivers and antennas, Delco is not required to manufacture specified
quantities under this agreement.
Recoton Agreement. On February 23, 1999, we entered into an agreement with
Recoton to design and develop specifications for the FM modulated receiver
(including the receiver device) and the radio card, and manufacture prototypes
of each. Recoton, the owner of the Jensen, Advent, AR/Acoustic Research and
Interact brands, is a worldwide manufacturer and distributer of consumer
electronic products, and is the third largest producer of aftermarket car
stereos sold in the U.S. As part of this agreement, we also agreed to deliver to
Recoton plans and specifications for a hard-wired satellite antenna, which we
have separately developed. Recoton has agreed to manufacture prototypes of this
hard-wired satellite antenna for use with FM modulated receivers and to use
commercially reasonable efforts to design and develop a wireless satellite
antenna for use with radio cards. We have agreed to pay Recoton, when specified
development milestones are completed, specific costs relating to designing and
manufacturing prototypes of the FM modulated receiver, the radio card, the
hard-wired satellite antenna and the wireless satellite antenna. Recoton has
agreed to deliver to us plans and specifications for the FM modulated receiver,
the radio card and the wireless satellite antenna within 90 business days after
Lucent delivers to us plans and specifications for the chip set. Similarly,
Recoton has agreed to deliver to us prototypes of the FM modulated receiver, the
radio card, the hard-wired satellite antenna and the wireless satellite antenna
within 90 business days after Lucent delivers to us prototypes of the chip set.
We cannot assure you that Recoton will be able to design and develop the FM
modulated receiver, the radio card or the wireless satellite antenna or that
Recoton will be able to manufacture prototypes of the FM modulated receiver, the
radio card, the hard-wired satellite antenna or the wireless satellite antenna.
As part of our agreement with Recoton, Recoton has also agreed to negotiate
with us in good faith an agreement to manufacture, market and sell substantial
quantities of FM modulated receivers, radio cards, three-band receivers,
hard-wired satellite antennas and wireless satellite antennas which are capable
of receiving CD Radio broadcasts using Recoton's distribution network and under
our brand name. These negotiations with Recoton are in an early stage and we
cannot assure you that we will be able to complete a manufacturing and marketing
agreement with Recoton. Recoton has one of the largest distribution systems for
automotive consumer electronics with more than 1,000 retail customers, which
Recoton believes have more than 30,000 outlets in the United States and Canada.
Alpine Agreement. On July 12, 1999, we entered into an agreement with
Alpine to design and develop three-band receivers with antennas. Alpine is a
leading manufacturer of high performance mobile electronics. We have agreed to
pay Alpine incentive payments for completing three milestones for delivery of
prototype receivers, including the presentation of a functioning CD Radio
receiver by January 2001. We cannot assure you that Alpine will be able to
design and develop these three-band receivers with antennas or that Alpine will
meet any anticipated milestone dates. In addition, Alpine is not required to
manufacture specified quantities of receivers under this agreement.
Panasonic Agreement. On July 22, 1999, we entered into an agreement with
Matsushita Communication Industrial Corporation of USA ('Panasonic'), a
subsidiary of Matsushita, to design and develop three-band receivers with
antennas. Matsushita is the world's largest consumer
S-36
<PAGE>
electronics company and the maker of Panasonic products. We have agreed to pay
Panasonic incentive payments for completing three milestones for delivery of
prototype receivers. We cannot assure you that Panasonic will be able to design
and develop these three-band receivers with antennas or that Panasonic will meet
any targeted milestone dates. In addition, Panasonic is not required to
manufacture specified quantities of receivers under this agreement.
None of the CD Radio receivers or antennas is currently available and,
other than Delco, Recoton, Alpine, Panasonic and Visteon (a unit of Ford), we
are not aware of any manufacturer currently developing these products. We have
commenced discussions with several other manufacturers regarding manufacturing
receivers and antennas for retail sale in the United States. We cannot assure
you that these discussions will result in a binding commitment by any
manufacturer to produce receivers and antennas in a timely manner so as to
permit the widespread introduction of CD Radio in accordance with our business
plan or that sufficient quantities of receivers and antennas will be available
to meet anticipated consumer demand. Failure to have at least one manufacturer
develop and widely market receivers and antennas at affordable prices, or to
develop and widely market these products upon the launch of CD Radio, would have
a material adverse effect on our business. In addition, our FCC license depends
on us certifying that our system includes a receiver design that will permit end
users to access the system of the other licensee.
In addition to our agreement with Ford, we are currently in discussions
with several other automobile manufacturers to include CD Radio reception
capability either as standard or optional equipment in new cars. We do not
expect CD Radio reception capability to be included in new vehicles before the
fourth quarter of 2000. Our long-term objective is to promote the adoption of
three-band radios as standard equipment in all automobiles sold in the United
States.
To reduce fraud, each CD Radio receiver will contain a security circuit
with an electronically encoded identification number. After verification of
subscriber billing information, we will transmit a digital signal to activate
the receiver's CD Radio capability. This feature will help us protect against
piracy of CD Radio's broadcasts. Through this feature, we will directly (via
satellite) deactivate receivers of subscribers who are delinquent in paying the
monthly subscription fee.
THE NATIONAL BROADCAST STUDIO
We will originate our programming from our National Broadcast Studio in
Rockefeller Center in New York City. The National Broadcast Studio will house
our corporate headquarters, our music library, facilities for programming
origination, programming personnel and program hosts, and facilities to transmit
programming to our orbiting satellites, to activate or deactivate service to
subscribers and to perform the tracking, telemetry and control of the
satellites.
Programming will be originated at the National Broadcast Studio and
transmitted to our satellites for broadcast to CD Radio subscribers. We expect
that our broadcast transmissions will be uplinked to our satellites at
frequencies in the 7060-7072.5 MHz band. The satellites will receive and convert
the signal to the 2320.0-2332.5 MHz band. The satellites then will broadcast the
signal to the United States, at a power level sufficient to enable its receipt
directly by subscribers. Service-related commands also will be relayed from the
National Broadcast Studio to our satellites for retransmission to subscribers'
receivers. These service-related commands include those required to
(1) initiate and suspend subscriber service, (2) change the encryption
parameters in receivers to reduce piracy and (3) activate receiver displays to
show program related information.
Tracking, telemetry and control of our orbiting satellites also will be
performed from the National Broadcast Studio. These activities will include
routine stationkeeping, such as satellite orbital adjustments and monitoring of
the satellites. Loral Skynet is designing, developing, integrating, installing
and testing our tracking, telemetry and command facilities. Loral Skynet also
will provide back-up tracking, telemetry and command capabilities from its
facility in Vernon, New Jersey. As part of our tracking, telemetry and command
facilities, Loral Skynet is constructing for
S-37
<PAGE>
us two earth stations in Quito, Ecuador, and Utibe, Panama. These earth
stations, which will be operated by Loral Skynet, will permit us to continuously
communicate with our satellites.
DEMONSTRATIONS OF THE CD RADIO SYSTEM
In support of our application for our FCC license, we conducted a
demonstration of our proposed radio service from November 1993 through November
1994. The demonstration involved the transmission of S-band signals to a
prototype S-band radio and satellite dish antenna installed in a car to simulate
some of the transmission characteristics of our planned system. Because there
are no commercial satellites in orbit capable of transmitting S-band frequencies
to the United States, we constructed a terrestrial simulation of our planned
system. For this purpose, we selected a test range covering several kilometers
near Washington, D.C. which included areas shadowed by buildings, trees and
overpasses. We placed S-band transmitters on the rooftops of a number of tall
buildings in such a way as to simulate the signal power and angle of arrival of
satellite transmissions to be used for our proposed service. We also modified
the standard factory installed sound system of an automobile to create a radio
receiving AM, FM and S-band signals, and integrated our satellite dish antenna
into the car roof. The demonstrations included the reception of 30 channels of
compact disc quality stereo music by the prototype radio while the car was
driven throughout the test range. We have also successfully tested our system in
San Francisco, where construction of our terrestrial repeater network has been
completed. Before testing with orbiting satellites, antennas and receivers
suitable for commercial production, we cannot assure you that the CD Radio
system will function as intended. See 'Risk Factors -- Our Planned System Relies
on Unproven Applications of Technology.'
COMPETITION
We expect to face competition from two principal sources: (1) conventional
AM/FM radio broadcasting, including, when available, terrestrial digital radio
broadcasting; and (2) XM, the other holder of an FCC license to provide a
satellite-based digital audio radio service. XM recently announced that it had
entered into an exclusive agreement with General Motors Corporation, which has a
significant equity interest in XM's parent company, under which GM would install
devices capable of receiving XM's signal beginning in 2001. In addition, XM has
obtained substantial financing from GM, Hughes Electronics Corporation (a GM
subsidiary) and several other investors.
The AM/FM radio broadcasting industry is very competitive. Radio stations
compete for listeners and advertising revenues directly with other radio
stations within their markets on the basis of a variety of factors, including
program content, on-air talent, transmitter power, assigned frequency, audience
characteristics, local program acceptance and the number and characteristics of
other radio stations in the market. Many of our radio broadcasting competitors
have substantially greater financial resources than we do.
Unlike CD Radio, the radio industry has a well established market for its
services and generally offers 'free' broadcast reception paid for by commercial
advertising rather than by a subscription fee. In addition, some AM and FM
stations, such as National Public Radio, offer programming without commercial
interruption. Many radio stations also offer information programming of a local
nature, such as local news or traffic reports, which we may be unable to offer.
CD Radio will compete with conventional radio stations on the basis of its
targeted programming formats, nearly seamless signal coverage, freedom from
advertising and digital quality sound, features which are largely unavailable on
conventional broadcast radio.
Currently, radio stations broadcast by means of analog signals, as opposed
to digital transmission. We believe, however, that within several years,
terrestrial broadcasters may be able to place digital audio broadcasts into the
bandwidth occupied by current AM and FM stations and simultaneously transmit
both analog and digital signals on the AM and FM bands. The limited bandwidth
assigned to AM stations will result in lower quality digital signals than can be
broadcast by FM stations. As a result, we expect that the use of this technology
will permit digital AM
S-38
<PAGE>
sound quality to approach monaural FM sound quality and permit digital FM
broadcasts to approach compact disc sound quality. To receive these digital
AM/FM broadcasts, listeners will need to purchase new digital radios which
currently are not commercially available. While the development of digital
broadcasting would eliminate one of the advantages of CD Radio over FM radio, we
do not believe it would affect broadcasters' ability to address the other
advantages of CD Radio. In addition, we view the growth of terrestrial digital
broadcasting as a positive force that would encourage listeners to replace
existing radios and thereby facilitate the introduction of receivers capable of
receiving CD Radio broadcasts.
Although some existing satellite operators currently provide music
programming to customers at fixed locations, these operators are incapable of
providing CD Radio-type service to vehicles as a result of some or all of the
following reasons: (1) these operators do not broadcast on radio frequencies
suitable for reception in a mobile environment; (2) CD Radio-type service
requires fully dedicated satellites; (3) CD Radio-type service requires a custom
satellite system design; and (4) CD Radio-type service requires regulatory
approvals, which existing satellite operators do not have.
The FCC could also grant new licenses that would enable additional
competitors to broadcast satellite radio. Finally, there are many portions of
the electromagnetic spectrum that are currently licensed for other uses and some
other portions for which licenses have been granted by the FCC without
restriction as to use, and we cannot assure you that these portions of the
spectrum could not be utilized for satellite radio broadcasting in the future.
Although any of these licensees would face cost and competition barriers, we
cannot assure you that there will not be an increase in the number of
competitors in the satellite radio industry.
TECHNOLOGY AND PATENTS
We have been granted U.S. patents on various features of satellite radio
technology. We cannot assure you, however, that any U.S. patent issued to us
will cover our actual commercialized technology or will not be circumvented by
others, or that if challenged would be held to be valid. We have filed patent
applications covering CD Radio system technology in Argentina, Australia,
Brazil, Canada, China, France, Germany, India, Italy, Japan, South Korea,
Mexico, the Netherlands, Spain, Switzerland and the United Kingdom, and been
granted patents in a number of these countries. We cannot assure you that
additional foreign patents will be awarded to us or, if any of these patents are
granted, that the laws of foreign countries where we receive patents will
protect our proprietary rights to our technology to the same extent as the laws
of the United States. Although we believe that obtaining patent protection may
provide benefits, we do not believe that our business is dependent on obtaining
patent protection or successfully defending any of the patents that may be
obtained against infringement by others.
Some of our know-how and technology is not the subject of U.S. patents. To
protect our rights, we require some of our employees, consultants, advisors and
collaborators to enter into confidentiality agreements. We cannot assure you,
however, that these agreements will provide meaningful protection for our trade
secrets, know-how or other proprietary information if there is any unauthorized
use or disclosure. In addition, our business may be adversely affected by
competitors who independently develop competing technologies.
Our proprietary technology was principally developed by Robert D. Briskman,
CD Radio's co-founder, and was assigned and belongs to us. We believe that we
are the sole owner of the technology covered by our issued patents. We cannot
assure you, however, that third parties will not bring suit against us for
patent infringement or for declaratory judgment to have our patents declared
invalid. On January 12, 1999, we filed a lawsuit against XM in the United States
District Court for the Southern District of New York. The lawsuit alleges patent
infringement by XM of our U.S. Patent Nos. 5,319,673, 5,485,485 and 5,592,471.
The court has since entered a scheduling order, and the parties have begun
document production and discovery. We expect the trial to begin in January of
2001. See ' -- Legal Proceedings.'
S-39
<PAGE>
If a dispute arises concerning our patents, trade secrets or know-how,
litigation might be necessary to enforce our patents, to protect our trade
secrets or know-how or litigation may occur to determine the scope of the
proprietary rights of others. This litigation could result in substantial cost
to, and diversion of effort by, us, and adverse findings in any proceeding could
subject us to significant liabilities to third parties, require us to seek
licenses from third parties or otherwise adversely affect our ability to
successfully develop and market CD Radio.
GOVERNMENT REGULATION
As an operator of a privately owned satellite system, we are regulated by
the FCC under the Communications Act. The FCC is the government agency with
primary authority in the United States over satellite radio communications. We
currently must comply with regulation by the FCC principally with respect to
(1) the licensing of our satellite system; (2) preventing interference with or
to other users of radio frequencies; and (3) compliance with rules that the FCC
has established specifically for United States satellites and rules that the FCC
has established for providing a satellite radio service.
On May 18, 1990, we proposed that the FCC establish a satellite radio
service and applied for an FCC license. On March 3, 1997, the FCC adopted rules
for the national satellite radio broadcast service (the 'FCC Licensing Rules').
Pursuant to the FCC Licensing Rules, an auction was held among the applicants on
April 1 and 2, 1997. We were a winning bidder for one of two FCC licenses with a
bid of approximately $83 million. XM was the other winning bidder for an FCC
license with a bid of $89 million. After payment of the full amount by us, on
October 10, 1997, the FCC's International Bureau issued us a license to place
two satellites in a geostationary orbit. Our FCC license was effective
immediately; however, for a period of 30 days following the grant of the FCC
license, those parties that had filed comments or petitions to deny in
connection with our application for an FCC license were entitled to petition the
International Bureau to reconsider its decision to grant the FCC license to us
or request review of the decision by the full FCC. An application for review by
the FCC was filed by one of the low-bidding applicants in the auction. This
petition requests, among other things, that the FCC adopt restrictions on
foreign ownership, which were not applied in the license issued to us by the
FCC's International Bureau on October 10, 1997 (the 'IB Order'), and, on the
basis of our ownership, overrule the IB Order. Since December 1997, there have
been no further developments concerning this petition.
Although we believe the FCC will uphold the IB Order, we cannot predict the
ultimate outcome of any proceedings relating to this petition or any other
proceeding that may be filed. If this petition is denied, the complaining party
may file an appeal with the U.S. Court of Appeals which must find that the
decision of the FCC was not supported by substantial evidence, or was arbitrary,
capricious or unlawful to overturn the grant of our FCC license.
Under the FCC Licensing Rules, we are required to meet specific progress
milestones. We are required to begin satellite construction within one year of
the grant of our FCC license; to launch and begin operating our first satellite
within four years; and to begin operating our entire system within six years.
The IB Order states that failure to meet these milestones will render our FCC
license null and void. On May 6, 1997, we notified the FCC that we had begun
construction on the first of our satellites. On March 27, 1997, a third party
requested reconsideration of the FCC Licensing Rules, seeking, among other
things, that the time period allotted for these milestones be shortened. To
date, the FCC has not responded to the petition for reconsideration. We cannot
predict the outcome of this petition.
In 1998, we decided to increase the number of satellites in our system from
two to three and modify our orbits from geostationary to inclined, elliptical
geosynchronous, requiring modification of our FCC license. On December 11, 1998,
we filed an application with the FCC for this modification. Although we believe
that the FCC will approve our application for this change, we cannot assure you
that this will occur. XM and WCS Radio Inc. have filed comments opposing our
application with the FCC. The FCC staff has requested additional materials from
us, and we are in the process of complying with the staff's request. We cannot
predict the time it will take the FCC to act on our application or any of those
objections, or whether additional submissions or
S-40
<PAGE>
waiver requests will be necessary, and we cannot be sure that the modification
we have requested will be granted. Failure of the FCC to approve the requested
modification to our license in a timely fashion would have a material adverse
effect on our business, financial condition and prospects.
The term of our FCC license for each satellite is eight years, commencing
from the time each satellite is declared operational after having been inserted
into orbit. Upon the expiration of the term with respect to each satellite, we
will be required to apply for a renewal of the relevant FCC license. Although we
anticipate that, absent significant misconduct on our part, the FCC licenses
will be renewed in due course to permit operation of our satellites for their
useful lives, and that a license would be granted for any replacement
satellites, we cannot assure you of this renewal or grant.
The spectrum allocated by the FCC for satellite radio in the United States
is used in Canada and Mexico for terrestrial microwave links, mobile telemetry
and other purposes. In September 1998, the United States government and Canada
reached an agreement to coordinate the use of this spectrum. Under the rules
adopted by the FCC on March 3, 1997 for the national satellite radio broadcast
service, the United States government must still coordinate the United States'
use of this spectrum with the Mexican government before our satellites may
become operational. The FCC Licensing Rules require that both ourselves and XM
successfully complete detailed frequency coordination with existing operations
in Mexico, and the IB Order conditions our FCC license on this coordination.
Although the United States government has begun this coordination process with
Mexico, we cannot assure you that we will be able to coordinate the use of this
spectrum with Mexican operators or will be able to do so in a timely manner.
To operate our satellites, we also will have to obtain a license from the
FCC to operate our uplink facility. Normally, this approval is sought after
issuance of an FCC license. Although we cannot assure you that these licenses
will be granted, we do not expect difficulties in obtaining a feeder link
frequency and ground station approval in the ordinary course.
In the future, any assignments or transfers of control of our FCC license
must be approved by the FCC. We cannot assure you that the FCC would approve any
of these transfers or assignments.
The CD Radio system is designed to permit CD Radio to be received by
motorists in all outdoor locations where the vehicle has an unobstructed
line-of-sight with one of our satellites. In some areas with high concentrations
of tall buildings, such as urban cores, or in tunnels, signals from our
satellites will be blocked and reception will be adversely affected. In these
cases, we plan to install terrestrial repeating transmitters to broadcast
CD Radio. The FCC has not yet established rules governing the application
procedure for obtaining authorizations to construct and operate terrestrial
repeating transmitters. A rulemaking on the subject was initiated by the FCC on
March 3, 1997. The deadline for the public to file comments was June 13, 1997
and the deadline for filing reply comments was June 27, 1997. Several comments
were received by the FCC that sought to cause the FCC to consider placing
restrictions on our ability to deploy our terrestrial repeating transmitters.
The repeaters we have constructed in San Francisco are operating under temporary
experimental licenses. We cannot predict the outcome, or the timing of, these
FCC proceedings. In addition, in connection with the installation and operation
of our terrestrial repeating transmitters, we need to obtain the rights to use
towers or the roofs of some structures where the transmitters will be installed.
We cannot assure you that we can obtain these tower or roof rights on acceptable
terms or in appropriate locations for the operation of CD Radio.
The IB Order conditions our FCC license on us certifying that our system
includes a receiver design that will permit end users to access XM's system. We
have made progress towards developing a receiver which is interoperable with the
satellite digital audio radio system XM is constructing. However, because of the
various technological challenges involved in designing an interoperable
receiver, we cannot predict whether we will be able to satisfy this
interoperability requirement. Complying with this interoperability requirement
could make the devices capable of receiving CD Radio broadcasts and the related
antenna more difficult and costly to manufacture.
S-41
<PAGE>
Accordingly, this interoperability requirement could delay the commercial
introduction of these products or require that they be sold at higher prices.
The FCC has proposed to update regulations for a new type of lighting
device that may generate radio energy in the part of the spectrum to be used by
us. The devices would be required to comply with FCC rules that prohibit these
devices from causing harmful interference to an authorized radio service such as
CD Radio. However, unless the FCC adopts adequate technical standards
specifically applicable to these devices, it may be difficult for us to enforce
our rights if the use of these devices were to become commonplace. We believe
that the currently proposed FCC rules must be strengthened to assure protection
of our spectrum. The FCC's failure to adopt adequate standards could have a
material adverse effect on reception of our broadcasts. We believe that the FCC
will set adequate standards to prevent harmful interference, although we cannot
assure you that it will do so.
Our business operations as currently contemplated may require a variety of
permits, licenses and authorizations from governmental authorities other than
the FCC, but we have not identified any permit, license or authorization that we
believe could not be obtained in the ordinary course of business.
The Communications Act prohibits the issuance of a license to a foreign
government or a representative of a foreign government, and contains limitations
on the ownership of common carrier, broadcast and some other radio licenses by
non-U.S. citizens. We are regulated as a private carrier, not a common carrier,
by the FCC. As such, the IB Order determined that we are not bound by the
foreign ownership provisions of the Communications Act. The FCC has before it a
petition to apply the foreign ownership rules to digital audio radio services,
but has not acted on that petition or indicated that it is likely to do so in
the near future. As a private carrier, we are free to set our own prices and
serve customers according to our own business judgment, without economic
regulation.
The foregoing discussion reflects the application of current communications
law, FCC regulations and international agreements to our proposed service in the
United States. Changes in law, regulations or international agreements relating
to communications policy or to matters affecting specifically the services
proposed by us could adversely affect our ability to retain our FCC license and
obtain or retain other approvals required to provide CD Radio or the manner in
which our proposed service would be regulated. Further, actions of the FCC may
be reviewed by federal courts and we cannot assure you that if challenged, these
actions would be upheld.
PERSONNEL
As of September 3, 1999, we had 71 employees and 18 part time consultants.
By commencement of operations, we expect to have approximately 150 employees.
The extent and timing of the increase in staffing will depend on the
availability of qualified personnel and other developments in our business. None
of our employees is represented by a labor union, and we believe that our
relationship with our employees is satisfactory.
LEGAL PROCEEDINGS
On January 12, 1999, we filed a lawsuit against XM in the United States
District Court for the Southern District of New York. The lawsuit alleges patent
infringement by XM of our U.S. Patent Nos. 5,319,673, 5,485,485 and 5,592,471.
We are seeking, among other things, an injunction against infringement by XM by
any manufacture, use, offer for sale or sale within the scope of any claim of
U.S. Patents Nos. 5,319,673, 5,485,485 and 5,592,471. On March 1, 1999, XM
answered our complaint in this lawsuit, denying our allegations and asserting
affirmative defenses. The court has since entered a scheduling order, and the
parties have begun document production and discovery. We expect the trial to
begin in January of 2001. While we believe that we should prevail in this
lawsuit, we cannot assure you that the Court will rule in our favor.
Except as described above, we are not a party to any material litigation.
S-42
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors are described below. Our directors
stand for election annually.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH CD RADIO
---- --- -------------------------
<S> <C> <C>
David Margolese........................... 41 Chairman, Chief Executive Officer and Director
Robert D. Briskman........................ 66 Executive Vice President, Engineering
and Director
Ira H. Bahr............................... 36 Senior Vice President, Marketing
Joseph S. Capobianco...................... 49 Senior Vice President, Content
Patrick L. Donnelly....................... 37 Senior Vice President, General Counsel and
Secretary
Lawrence F. Gilberti(1)(2)................ 48 Director
Joseph V. Vittoria(1)(2).................. 63 Director
Ralph V. Whitworth(1)(2).................. 43 Director
</TABLE>
- ------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
DAVID MARGOLESE has served as Chairman and Chief Executive Officer since
August 1993, and as a director since August 1991. Before his involvement with CD
Radio, Mr. Margolese proposed and co-founded Cantel Inc., Canada's national
cellular telephone carrier, which was acquired by Rogers Communications Inc. in
1989, and Canadian Telecom Inc., a radio paging company, serving as that
company's president until the company's sale in 1987.
ROBERT D. BRISKMAN is CD Radio's co-founder and has served as Executive
Vice President, Engineering, and as a director since October 1991. Before 1986,
during his twenty-two year career at Communications Satellite Corporation, a
satellite communications company, he was responsible for the engineering and
implementation of numerous major satellite systems, including ITALSAT, ARABSAT
and CHINASAT. Mr. Briskman was one of the early engineers hired at NASA in 1959,
and received the APOLLO Achievement Award for the design and implementation of
the Unified S-Band System. He is past chairman of the IEEE Standards Board, past
president of the Aerospace and Electronics Systems Society and served on the
industry advisory council to NASA. He is the Telecommunications Editor of McGraw
Hill's Encyclopedia of Science and Technology and is a recipient of the IEEE
Centennial Medal.
IRA H. BAHR has served as Senior Vice President, Marketing, since October
1998. From June 1998 to October 1998, Mr. Bahr was Vice President, Marketing.
Previously, Mr. Bahr held senior management positions at BBDO New York, a
worldwide advertising agency. From 1992 through 1998, Mr. Bahr was Senior Vice
President and Worldwide Account Director in charge of the agency's relationship
with Federal Express. In that role, he planned, managed and executed FedEx
advertising and promotional programs around the world and worked closely with
FedEx executive management in developing long term business and branding
strategies.
JOSEPH S. CAPOBIANCO has served as Senior Vice President, Content, since
April 1997. From 1981 to April 1997, he was an independent consultant providing
programming, production, marketing and strategic planning consulting services to
media and entertainment companies, including Home Box Office, a cable television
service and a subsidiary of Time Warner Entertainment Company, L.P., and ABC
Radio. From May 1990 to February 1995, he served as Vice President of
Programming at Music Choice, which operates a 40-channel music service available
to subscribers to DIRECTV, and is partially owned by Warner Music Group Inc.,
Sony Entertainment Inc. and EMI.
PATRICK L. DONNELLY has served as Senior Vice President, General Counsel
and Secretary since May 1998. From June 1997 to May 1998, he was Vice President
and Deputy General Counsel of ITT Corporation, a hotel, gaming and entertainment
corporation that was acquired by Starwood
S-43
<PAGE>
Hotels & Resorts Worldwide, Inc. in February 1998. From October 1995 to June
1997, he was Assistant General Counsel of ITT Corporation. Before October 1995,
Mr. Donnelly was an associate at the law firm of Simpson Thacher & Bartlett.
LAWRENCE F. GILBERTI has been a director of CD Radio since September of
1993 and served as its Secretary from November 1992 until May 1998. Since
December 1992, he has been the Secretary and sole director of, and from
December 1992 to September 1994 was the President of, Satellite CD Radio, Inc.,
our subsidiary which holds our FCC license. Mr. Gilberti is of counsel to the
law firm of Reed Smith Shaw & McClay LLP and has provided legal services to CD
Radio since 1992. From August 1994 to May 1998, Mr. Gilberti was a partner in
the law firm of Fischbein Badillo Wagner & Harding; and from 1987 to
August 1994, was an attorney with the law firm of Goodman Phillips & Vineberg.
JOSEPH V. VITTORIA has been a director of CD Radio since April 1998. Since
1997, Mr. Vittoria has served as Chairman and Chief Executive Officer of Travel
Services International, Inc., a travel services distributor, and as a member of
the Board of Overseers of Columbia Business School. From September 1987 to
February 1997, Mr. Vittoria was the Chairman and Chief Executive Officer of Avis
Inc., one of the world's largest rental car companies, and served as its
President and Chief Operating Officer during the prior five years. During that
time, Mr. Vittoria was responsible for creating the Avis Employee Stock
Ownership Plan and for the sale of Avis to HFS Incorporated in 1996.
RALPH V. WHITWORTH has been a director of CD Radio since March 1994.
Mr. Whitworth has been a principal and managing member at Relational Investors,
LLC, a private investment company, since March 1996. Since April 1998, he has
been Chairman of Apria Healthcare Group Inc., a home-health company. In January
1997, Mr. Whitworth became a partner of Batchelder & Partners, Inc., a financial
advisory firm. From August 1988 to December 1996, he was President of Whitworth
and Associates, a Washington, D.C.-based consulting firm. Mr. Whitworth was
President of United Shareholders Association, a shareholders' association, from
its founding in 1986 to 1993. Mr. Whitworth is also a director of Wilshire
Technologies Inc. and Chairman of the Board of Directors of Waste Management,
Inc.
S-44
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Gilberti, a director, is of counsel to the law firm of Reed Smith
Shaw & McClay LLP and has provided legal services to us since 1992.
Under an agreement dated October 21, 1992, we retained Batchelder &
Partners, Inc. ('Batchelder') to provide financial consulting services. We
agreed to terminate the agreement with Batchelder on November 30, 1997; however,
the parties agreed that the termination would not affect our obligations with
respect to some transactions entered into within 24 months of the termination
date. In January 1997, Mr. Whitworth became a partner in Batchelder. In the
fiscal year ended December 31, 1998, Mr. Whitworth, as a partner in Batchelder,
received $205,149 from the total fees we paid to Batchelder. We provided options
to purchase our shares of common stock to Batchelder and on December 29, 1997,
Mr. Whitworth received a portion of these as an option to purchase 17,800 shares
of our common stock at an exercise price of $6.25. This option is exercisable
for a period of 10 years from the date of grant. In connection with the sale in
May 1999 of the units consisting of the initial notes and warrants, we paid
Batchelder a fee of $2,000,000. During that period, Mr. Whitworth had the right
to receive 9.44% of Batchelder's net profits.
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial ownership
of CD Radio's Common Stock as of August 31, 1999 by (1) each stockholder known
by CD Radio to be the beneficial owner of more than 5% of the outstanding Common
Stock, (2) each director of CD Radio, (3) each executive officer of CD Radio and
(4) all directors and executive officers as a group. Except as otherwise
indicated, we believe that the beneficial owners of the Common Stock listed
below, based on information furnished by these owners, have sole investment and
voting power with respect to these shares, except as otherwise provided by
community property laws where applicable.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF TOTAL
NAMES AND ADDRESS OF OF COMMON STOCK COMMON STOCK
BENEFICIAL OWNER OF COMMON STOCK(1) BENEFICIALLY OWNED BENEFICIALLY OWNED(2)
----------------------------------- ------------------ ---------------------
<S> <C> <C>
David Margolese(3) 5,975,293 24.0%
Prime 66 Partners, L.P.(4) .............................. 5,066,700 21.7%
201 Main Street
Suite 3200
Fort Worth, Texas 76102
Apollo Investment Fund IV, L.P.(5) ...................... 4,500,000 16.2%
Apollo Overseas Partners IV, L.P.
Two Manhattanville Road
Purchase, New York 10577
Everest Capital Master Fund, L.P.(6)(7) ................. 4,256,299 15.5%
Everest Capital Limited
c/o Morgan Stanley & Co. Incorporated
One Pierpont Plaza
10th Floor
Brooklyn, New York 11201
Darlene Friedland(8) .................................... 2,834,500 12.1%
1210 Wolseley Road
Point Piper 2027
Sydney, Australia
Loral Space & Communications Ltd.(9) .................... 1,905,488 8.2%
600 Third Avenue
New York, New York 10016
Robert D. Briskman(10) .................................. 193,254 *
Lawrence F. Gilberti(11) ................................ 55,000 *
Joseph V. Vittoria(12) .................................. 31,667 *
</TABLE>
(table continued on next page)
S-45
<PAGE>
(table continued from previous page)
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF TOTAL
NAMES AND ADDRESS OF OF COMMON STOCK COMMON STOCK
BENEFICIAL OWNER OF COMMON STOCK(1) BENEFICIALLY OWNED BENEFICIALLY OWNED(2)
----------------------------------- ------------------ ---------------------
<S> <C> <C>
Ralph V. Whitworth(13) .................................. 72,800 *
Joseph S. Capobianco(14) ................................ 42,888 *
Ira H. Bahr(15) ......................................... 27,651 *
Patrick L. Donnelly(16) ................................. 35,308 *
All Executive Officers and Directors as a Group
(8 persons)(17) ....................................... 6,433,861 25.4%
</TABLE>
- ------------
* Less than 1%
(1) This table is based upon information supplied by directors, officers and
principal stockholders. Percentage of ownership is based on shares of
Common Stock outstanding on August 31, 1999. Unless otherwise indicated,
the address of the beneficial owner is that of CD Radio.
(2) Determined as provided by Rule 13d-3 under the Exchange Act. Under this
rule, a person is deemed to be the beneficial owner of securities that can
be acquired by this person within 60 days from the date of determination
upon the exercise of options, and each beneficial owner's percentage
ownership is determined by assuming that options that are held by this
person (but not those held by any other person) and that are exercisable
within 60 days from the date of determination have been exercised.
(3) Includes 793 shares of Common Stock acquired under CD Radio's 401(k) Plan
and 1,540,000 shares of Common Stock issuable under stock options that are
exercisable within 60 days. Under a voting trust agreement (the 'Voting
Trust Agreement') entered into by Darlene Friedland, as grantor, David
Margolese, as trustee, and CD Radio, Mr. Margolese has the power to vote in
his discretion all shares of Common Stock owned or acquired in the future
by Darlene Friedland and some of her affiliates (2,834,500 shares as of
August 31, 1999) until November 20, 2002. Does not include 960,000 shares
issuable under stock options that are not exercisable within 60 days.
(4) This information is based upon the Schedule 13D dated November 12, 1998
filed by Prime 66 Partners, L.P. with the Commission.
(5) Represents 1,350,000 shares of 9.2% Series A Junior Preferred Stock which
entitles the holder to vote as if the shares had been converted to Common
Stock. Each share of 9.2% Series A Junior Preferred Stock is entitled to
three and one-third votes per share. This information is based upon the
Schedule 13D dated December 23, 1998 filed by the Apollo Investors with the
Commission.
(6) Represents 57,711 shares of Common Stock and shares of Common Stock
issuable upon conversion of 442,545 shares of Series C Preferred Stock.
This information is based upon the Schedule 13D dated December 15, 1998
filed by Everest Capital Limited with the Commission.
(7) Includes shares of Common Stock issuable under warrants to purchase
1,740,000 shares of Common Stock at a purchase price of $50 per share.
These warrants are exercisable from June 15, 1998 through and including
June 15, 2005.
(8) Under the Voting Trust Agreement, David Margolese has the power to vote in
his discretion all shares of Common Stock owned or acquired by Darlene
Friedland and some of her affiliates (2,834,500 shares as of May 31, 1999)
until November 26, 2002.
(9) This information is based on the Schedule 13D dated August 14, 1997 filed
by Loral Space & Communications Ltd. with the Commission. Concurrently with
this offering and the offering of the Common Stock, Merrill Lynch and Loral
Space & Communications Ltd. will make arrangements for Merrill Lynch to
borrow up to approximately 1.9 million shares of our Common Stock from
Loral Space & Communications from time to time in private, but
arm's-length, transactions. See 'Underwriting -- General.'
(footnotes continued on next page)
S-46
<PAGE>
(footnotes continued from previous page)
(10) Includes 754 shares of Common Stock acquired under CD Radio's 401(k) Plan
and 192,500 shares of Common Stock issuable under stock options exercisable
within 60 days. Does not include 117,500 shares issuable under stock
options that are not exercisable within 60 days.
(11) Represents 55,000 shares of Common Stock issuable under stock options
exercisable within 60 days.
(12) Represents 31,667 shares of Common Stock issuable under stock options
exercisable within 60 days. Does not include 13,333 shares of Common Stock
issuable under stock options that are not exercisable within 60 days.
(13) Represents 72,800 shares of Common Stock issuable under stock options
exercisable within 60 days.
(14) Includes 388 shares of Common Stock acquired under CD Radio's 401(k) Plan
and 42,500 shares of Common Stock issuable under stock options exercisable
within 60 days. Does not include 97,500 shares of Common Stock issuable
under stock options that are not exercisable within 60 days.
(15) Includes 651 shares of Common Stock acquired under CD Radio's 401(k) Plan,
25,000 shares of Common Stock issuable under stock options exercisable
within 60 days and 2,000 shares of Common Stock owned by Mr. Bahr. Does not
include 225,000 shares of Common Stock issuable under stock options that
are not exercisable within 60 days.
(16) Includes 308 shares of Common Stock acquired under CD Radio's 401(k) Plan
and 35,000 shares of Common Stock issuable under stock options exercisable
within 60 days. Does not include 165,000 shares issuable under stock
options that are not exercisable within 60 days.
(17) Includes 1,994,467 shares of Common Stock issuable under stock options
exercisable within 60 days. Does not include 1,578,333 shares issuable
under stock options that are not exercisable within 60 days.
VOTING TRUST AGREEMENT
We are party to a Voting Trust Agreement by and among Darlene Friedland, as
grantor, and David Margolese, as the voting trustee. The following is a summary
of the material provisions of the Voting Trust Agreement. The complete text of
the Voting Trust Agreement is filed with the Commission as an exhibit to the
registration statement that includes the related prospectus.
The Voting Trust Agreement provides for the establishment of a trust (the
'Trust') into which there were deposited all of the shares of Common Stock owned
by Mrs. Friedland on August 26, 1997 and into which any shares of Common Stock
acquired by Mrs. Friedland, her spouse Robert Friedland, any member of either of
their immediate families or any entity directly or indirectly controlled by Mrs.
Friedland, her spouse or any member of their immediate families (the 'Friedland
Affiliates') between August 26, 1997 and the termination of the Trust must also
be deposited. The Trust will terminate on November 26, 2002.
The Voting Trust Agreement does not restrict the ability of Mrs. Friedland
or any of the Friedland Affiliates to sell, assign, transfer or pledge any of
the shares of Common Stock deposited into the Trust, nor does it prohibit Mrs.
Friedland or the Friedland Affiliates from purchasing additional shares of
Common Stock, provided those shares are deposited in the Trust, as described
above.
Under the Voting Trust Agreement, the trustee has the power to vote shares
of Common Stock held in the Trust in relation to any matter upon which the
holders of these shares of Common Stock would have a right to vote, including
without limitation the election of directors. For so long as David Margolese
remains trustee of the Trust, he may exercise these voting rights in his
discretion. Any successor trustee or trustees of the Trust must vote as follows:
on the election of directors, the trustee(s) must vote the entire number
of shares of Common Stock held by the Trust, with the number of shares of
Common Stock voted for
S-47
<PAGE>
each director (or nominee for director) determined by multiplying the
total number of votes held by the Trust by a fraction, the numerator of
which is the number of votes cast for this director by our other
stockholders and the denominator of which is the sum of the total number
of votes represented by all shares casting any votes in the election of
directors;
if the matter under Delaware law or our Amended and Restated Certificate
of Incorporation or our Amended and Restated Bylaws requires at least an
absolute majority of all outstanding shares of our Common Stock to be
approved, the trustee(s) must vote all of the shares of Common Stock in
the Trust in the same manner as the majority of all votes that are cast
for or against the matter by all other stockholders of CD Radio; and
on all other matters, including without limitation any amendment of the
Voting Trust Agreement for which a stockholder vote is required, the
trustee(s) must vote all of the shares in the Trust for or against the
matter in the same manner as all votes that are cast for or against the
matter by all of our other stockholders.
The Voting Trust Agreement may not be amended without our prior written
consent, acting by unanimous vote of the Board of Directors, and approval of our
stockholders, acting by the affirmative vote of two-thirds of our total voting
power, except in limited circumstances where amendments to the Voting Trust
Agreement must comply with applicable law.
S-48
<PAGE>
DESCRIPTION OF NOTES
The Notes are to be issued under an indenture to be dated as of
September 29, 1999, as supplemented by a supplemental indenture dated as of
September 29, 1999 (the 'Indenture'), between us and U.S. Trust Company of
Texas, N.A., as trustee (the 'Trustee'). A copy of the form of Indenture will be
made available to prospective investors in the Notes upon request to us, and
will be available for inspection during normal business hours at the corporate
trust office of the Trustee. The following summaries of certain provisions of
the Notes and the Indenture do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, all of the provisions of
the Notes and the Indenture, including the definitions therein of certain terms
which are not otherwise defined in this prospectus supplement. Wherever
particular provisions or defined terms of the Indenture (or of the form of Note
which is a part thereof) are referred to, such provisions or defined terms are
incorporated herein by reference. Unless the context suggests otherwise,
references in this 'Description of Notes' to the 'Company' refer to CD Radio
Inc. and not to its subsidiaries.
GENERAL
The Notes will be unsecured, subordinated obligations of the Company
limited to $125,000,000 aggregate principal amount ($143,750,000 aggregate
principal amount if the underwriters' over-allotment option is exercised in
full) and will mature on September 29, 2009. The principal amount of each Note
is $1,000 and will be payable at the office of the Paying Agent, which initially
will be the Trustee, or an office or agency maintained by the Company for such
purpose in the Borough of Manhattan, City of New York.
The Notes will bear interest at the rate of 8 3/4% per annum on the
principal amount from the Issue Date, or from the most recent date to which
interest has been paid or provided for until the Notes are paid in full or funds
are made available for payment in full of the Notes in accordance with the
Indenture. Interest will be payable at maturity (or earlier purchase, redemption
or, in certain circumstances, conversion) and semiannually on March 29 and
September 29 of each year (each an 'Interest Payment Date'), commencing on
March 29, 2000, to holders of record at the close of business on March 14 or
September 14 (whether or not a business day) immediately preceding each Interest
Payment Date (each a 'Regular Record Date'). Each payment of interest on the
Notes will include interest accrued through the day before the applicable
Interest Payment Date or the date of maturity (or earlier purchase, redemption
or, in certain circumstances, conversion), as the case may be. Any payment of
principal and cash interest required to be made on any day that is not a
business day will be made on the next succeeding business day. We currently
expect to fund interest payments through proceeds from the issuance of equity.
We cannot assure you that such issuance may be accomplished on terms
advantageous to us, or at all, or that alternative sources of financing will be
available to fund the interest payments.
In the event of the maturity, conversion, purchase by us at the option of a
holder or redemption of a Note, interest will cease to accrue on such Note,
under the terms and subject to the conditions of the Indenture. We may not
reissue a Note that has matured or been converted, redeemed or otherwise
canceled (except for registration of transfer, exchange or replacement thereof).
You may present Notes for conversion at the office of the Conversion Agent
and for exchange or registration of transfer at the office of the Registrar.
Each such agent shall initially be the Trustee.
FORM, DENOMINATION AND REGISTRATION
We expect to initially issue the Notes in the form of one or more Global
Notes. The Global Notes will be deposited with, or on behalf of, the clearing
agency registered under the Exchange Act that is designated to act as depositary
for the Notes and registered in the name of the depositary or its nominee. The
Depository Trust Company will be the initial depositary. For
S-49
<PAGE>
additional information concerning these provisions, see the section captioned
'Description of Debt Securities -- Book-Entry System' in the related prospectus.
SUBORDINATION OF NOTES
The Notes will be unsecured obligations of the Company and will be
subordinated in right of payment, as set forth in the Indenture, to the prior
payment in full in cash or other payment satisfactory to holders of Senior
Indebtedness of all our existing and future Senior Indebtedness.
At June 30, 1999, we had $479.7 million of senior indebtedness outstanding,
and our subsidiary had no indebtedness outstanding. The Indenture does not
restrict the incurrence by us or our subsidiaries of indebtedness or other
obligations.
The term 'Senior Indebtedness' means:
(1) the principal, premium, if any, interest and all other amounts owed in
respect of all the Company's (A) indebtedness for money borrowed and
(B) indebtedness evidenced by securities, debentures, bonds or other
similar instruments,
(2) all of the Company's capital lease obligations,
(3) all our obligations issued or assumed by the Company as the deferred
purchase price of property, all of the Company's conditional sale
obligations and all of the Company's obligations under any title
retention agreement (but excluding trade accounts payable arising in
the ordinary course of business),
(4) all of the Company's obligations for the reimbursement of any letter of
credit, banker's acceptance, security purchase facility or similar
credit transaction,
(5) all obligations of the type referred to in clauses (1) through (4)
above of other persons for the payment of which the Company is
responsible or liable as obligor, guarantor or otherwise, and
(6) all obligations of the type referred to in clauses (1) through (5)
above of other persons secured by any lien on any of the Company's
properties or assets (whether or not such obligation is assumed by the
Company),
except for (x) any such indebtedness that is by its terms subordinated to or
pari passu with the Notes and (y) any indebtedness between or among the Company
or affiliates of the Company, including all other debt securities and guarantees
in respect of those debt securities issued to any trust, or trustees of such
trust, partnership or other entity affiliated with the Company that is, directly
or indirectly, a financing vehicle of the Company (a 'Financing Entity') in
connection with the issuance by such Financing Entity of preferred securities or
other securities that rank pari passu with, or junior to, the Notes.
Such Senior Indebtedness shall continue to be Senior Indebtedness and entitled
to the benefits of the subordination provisions irrespective of any amendment,
modification or waiver of any term of such Senior Indebtedness.
By reason of such subordination, in the event of dissolution, insolvency,
bankruptcy or other similar proceedings, upon any distribution of our assets,
(1) the holders of the Notes are required to pay over their share of such
distribution to the trustee in bankruptcy, receiver or other person
distributing our assets for application to the payment of all Senior
Indebtedness remaining unpaid, to the extent necessary to pay all
holders of Senior Indebtedness in full in cash or other payment
satisfactory to the holders of Senior Indebtedness and
(2) unsecured creditors of ours who are not holders of Notes or holders of
Senior Indebtedness of ours may recover less, ratably, than holders of
Senior Indebtedness of ours and may recover more, ratably, than the
holders of Notes.
S-50
<PAGE>
In addition, no payment of the principal amount, Redemption Price, Change
in Control Purchase Price or interest with respect to any Notes may be made by
us, nor may we acquire any Notes for cash or property, except as set forth in
the Indenture, if:
(1) any payment default on any Senior Indebtedness has occurred and is
continuing beyond any applicable grace period or
(2) any default (other than a payment default) with respect to Senior
Indebtedness occurs and is continuing that permits the acceleration of
the maturity thereof and such default is either the subject of judicial
proceedings or we receive a written notice of such default (a 'Senior
Indebtedness Default Notice').
Notwithstanding the foregoing, payments with respect to the Notes may resume and
we may acquire Notes for cash when:
(a) the default with respect to the Senior Indebtedness is cured or waived
or ceases to exist or
(b) in the case of a default described in (2) above, 179 or more days pass
after notice of the default is received by us, provided that the terms
of the Indenture otherwise permit the payment or acquisition of the
Notes at that time.
If we receive a Senior Indebtedness Default Notice, then a similar notice
received within nine months thereafter relating to the same default on the same
issue of Senior Indebtedness shall not be effective to prevent the payment or
acquisition of the Notes as provided above. In addition, no payment may be made
on the Notes if any Notes are declared due and payable prior to their Stated
Maturity by reason of the occurrence of an Event of Default until the earlier
of:
(1) 120 days after the date of such acceleration or
(2) the payment in full of all Senior Indebtedness,
but only if such payment is then otherwise permitted under the terms of the
Indenture.
Upon any payment or distribution of our assets to creditors upon any
dissolution, winding up, liquidation or reorganization of us, whether voluntary
or involuntary, or in bankruptcy, insolvency, receivership or other similar
proceedings, the holders of all Senior Indebtedness shall first be entitled to
receive payment in full, in cash or other payment satisfactory to the holders of
Senior Indebtedness, of all amounts due or to become due thereon, or payment of
such amounts shall have been provided for, before the holders of the Notes shall
be entitled to receive any payment or distribution with respect to any Notes.
The Notes are effectively subordinated to all existing and future
liabilities of our subsidiaries. Any right of ours to receive assets of any of
our subsidiaries upon their liquidation or reorganization (and the consequent
right of the holders of the Notes to participate in those assets) will be
subject to the claims of that subsidiary's creditors (including trade
creditors), except to the extent that we ourselves are recognized as a creditor
of that subsidiary, in which case our claims would still be subordinate to any
security interests in the assets of that subsidiary and any indebtedness of that
subsidiary senior to that held by us.
For additional information concerning subordination, see the section
captioned 'Description of the Debt Securities -- Subordination' in the related
prospectus.
CONVERSION RIGHTS
A holder of a Note is entitled to convert it into shares of common stock at
any time before the close of business on September 29, 2009, provided, however,
that if a Note is called for redemption, the holder is entitled to convert it at
any time before the close of business on the Redemption Date. A Note in respect
of which a holder has delivered a Change in Control Purchase Notice (as defined
below) exercising the option of such holder to require the Company to purchase
such Note may be converted only if such notice is withdrawn by a written notice
of withdrawal delivered by the holder to the Paying Agent prior to the close of
business on the Change in Control Purchase Date, in accordance with the terms of
the Indenture.
S-51
<PAGE>
The initial Conversion Rate for the Notes is 35.134 shares of common stock
per $1,000 principal amount (equivalent to a conversion price of $28.4625 per
share of common stock), subject to adjustment upon the occurrence of certain
events described below. See 'Price Range of Common Stock.' A holder otherwise
entitled to a fractional share of common stock will receive cash in an amount
equal to the market value of such fractional share based on the closing sale
price on the trading day immediately preceding the Conversion Date. A holder may
convert a portion of such holder's Notes so long as such portion is $1,000
principal amount or an integral multiple thereof.
To convert a Note, a holder must:
(1) complete and manually sign the conversion notice on the back of the
Note (or complete and manually sign a facsimile thereof) and deliver
such notice to the Conversion Agent (initially the Trustee) at the
office maintained by the Conversion Agent for such purpose,
(2) surrender the Note to the Conversion Agent,
(3) if required, furnish appropriate endorsements and transfer documents,
and
(4) if required, pay all transfer or similar taxes.
Pursuant to the Indenture, the date on which all of the foregoing requirements
have been satisfied is the Conversion Date.
Upon conversion of a Note, a holder will not receive (except as provided
below) any cash payment representing accrued interest thereon. The Company's
delivery to the holder of the fixed number of shares of common stock into which
the Note is convertible (together with the cash payment, if any, in lieu of any
fractional shares) will satisfy the Company's obligation to pay the principal
amount of the Note, and the accrued and unpaid interest to the Conversion Date.
Thus, such accrued interest will be deemed to be paid in full rather than
cancelled, extinguished or forfeited. Notwithstanding the foregoing, accrued but
unpaid cash interest will be payable upon any conversion of Notes at the option
of the holder made concurrently with or after acceleration of the Notes
following an Event of Default described under ' -- Events of Default; Notice and
Waiver' below. Notes surrendered for conversion during the period from the close
of business on any Regular Record Date next preceding any Interest Payment Date
to the opening of business on such Interest Payment Date (except Notes to be
redeemed on a date within such period) must be accompanied by payment of an
amount equal to the interest thereon that the registered holder is to receive.
Except where Notes surrendered for conversion must be accompanied by payment as
described above, no interest on converted Notes will be payable by us on any
Interest Payment Date subsequent to the date of conversion. The Conversion Rate
will not be adjusted at any time during the term of the Notes for accrued
interest.
A certificate for the number of full shares of common stock into which any
Note is converted (and cash in lieu of any fractional shares) will be delivered
as soon as practicable, but in any event no later than the seventh Business Day
following the Conversion Date. For a summary of the U.S. federal income tax
treatment of a holder receiving common stock upon conversion, see 'Certain
Federal Income Tax Considerations -- Conversion of the Notes.'
The Conversion Rate is subject to adjustment in certain events, including
(a) the issuance of shares of common stock as a dividend or a distribution
with respect to common stock,
(b) subdivisions, combinations and reclassification of common stock,
(c) the issuance to all holders of common stock of rights or warrants
entitling them (for a period not exceeding 45 days) to subscribe for
shares of common stock at less than the then Market Price (as defined
below) of the common stock,
(d) the distribution to holders of common stock of evidences of our
indebtedness, securities or capital stock, cash or assets (including
securities, but excluding those rights, warrants, dividends and
distributions referred to above and dividends and distributions paid
exclusively in cash),
S-52
<PAGE>
(e) the payment of dividends (and other distributions) on common stock
paid exclusively in cash, excluding cash dividends if the aggregate
amount thereof, when taken together with (1) other all-cash
distributions made within the preceding 12 months not triggering a
Conversion Rate adjustment and (2) any cash and the fair market value,
as of the expiration of the tender or exchange offer referred to
below, of consideration payable in respect of any tender or exchange
offer by us or one of our subsidiaries for the common stock concluded
within the preceding 12 months not triggering a Conversion Rate
adjustment, does not exceed 10% of our aggregate market capitalization
(such aggregate market capitalization being the product of the current
market price of common stock as of the trading day immediately
preceding the date of declaration of such dividend multiplied by the
number of shares of common stock then outstanding) on the date of such
distribution; and
(f) payment to holders of common stock in respect of a tender or exchange
offer (other than an odd-lot offer) by us or one of our subsidiaries
for common stock as of the trading day next succeeding the last date
tenders or exchanges may be made pursuant to such tender or exchange
offer which involves an aggregate consideration that, together with
(1) any cash and the fair market value of other consideration payable
in respect of any tender or exchange offer by us or one of our
subsidiaries for the common stock concluded within the preceding
12 months and (2) the aggregate amount of any all-cash distributions
to all holders of our common stock made within the preceding
12 months, exceeds 10% of our aggregate market capitalization.
However, no adjustment need be made if holders may participate in the
transactions otherwise giving rise to an adjustment on a basis and with notice
that our Board of Directors determines to be fair and appropriate, or in certain
other cases specified in the Indenture. In cases where the fair market value of
the portion of assets, debt securities or rights, warrants or options to
purchase our securities applicable to one share of common stock distributed to
stockholders exceeds the Average Sale Price (as defined in the Indenture) per
share of common stock, or such Average Sale Price exceeds such fair market value
of such portion of assets, debt securities or rights, warrants or options so
distributed by less than $1.00, rather than being entitled to an adjustment in
the Conversion Rate, the holder of a Note upon conversion thereof will be
entitled to receive, in addition to the shares of common stock into which such
Note is convertible, the kind and amounts of assets, debt securities or rights,
options or warrants comprising the distribution that such holder would have
received if such holder had converted such Note immediately prior to the record
date for determining the stockholders entitled to receive the distribution. The
Indenture permits us to increase the Conversion Rate from time to time.
'Market Price' means, on any date in question, subject to certain
adjustments, the average of the daily closing prices for the 5 consecutive
trading days selected by the Company commencing not more than 20 trading days
before, and ending not later than, the date in question.
In the event that we become a party to any transaction (including, and with
certain exceptions,
(a) any recapitalization or reclassification of the common stock,
(b) any consolidation of us with, or merger of us into, any other Person,
or any merger of another Person into us,
(c) any sale, transfer or lease of all or substantially all of our assets
or
(d) any compulsory share exchange)
pursuant to which the common stock is converted into the right to receive other
securities, cash or other property (each of the foregoing being referred to as a
'Transaction'), then the holders of Notes then outstanding will have the right
to convert the Notes into the kind and amount of securities, cash or other
property receivable upon the consummation of such Transaction by a holder of the
number of shares of common stock issuable upon conversion of such Notes
immediately prior to such Transaction.
S-53
<PAGE>
In the case of a Transaction, each Note will become convertible into the
securities, cash or property receivable by a holder of the number of shares of
the common stock into which such Note was convertible immediately prior to such
Transaction. This change could substantially lessen or eliminate the value of
the conversion privilege associated with the Notes in the future. For example,
if we were acquired in a cash merger, each Note would become convertible solely
into cash and would no longer be convertible into securities whose value would
vary depending on our future prospects and other factors.
In the event of a taxable distribution to holders of common stock which
results in an adjustment of the Conversion Rate (or in which holders otherwise
participate) or in the event the Conversion Rate is increased at our discretion,
the holders of the Notes may, in certain circumstances, be deemed to have
received a distribution subject to United States federal income tax as a
dividend. Moreover, in certain other circumstances, the absence of such an
adjustment to the Conversion Rate may result in a taxable dividend to holders of
common stock. See 'Certain Federal Income Tax Considerations -- Adjustment of
Conversion Price.'
REDEMPTION OF NOTES AT THE OPTION OF THE COMPANY
No sinking fund is provided for the Notes. Prior to September 29, 2002, we
will not be entitled at our option to redeem the Notes. On and after that date,
we will be entitled to redeem the Notes for cash as a whole at any time, or from
time to time in part, upon not less than 30 days' nor more than 60 days' notice
of redemption given by mail to holders of Notes (unless a shorter notice shall
be satisfactory to the Trustee) at the Redemption Prices set forth below plus
accrued cash interest to the Redemption Date; provided, however, that we will
not be entitled to redeem the Notes on or after September 29, 2002, unless the
last reported sale price for our common stock is at least 150% of the conversion
price for at least 20 trading days within a period of 30 consecutive days ending
within five trading days of the call for redemption. Any such redemption must be
in integral multiples of $1,000 principal amount.
The table below shows Redemption Prices of a Note per $1,000 principal
amount if redeemed during the twelve-month periods set forth below.
<TABLE>
<CAPTION>
PERIOD REDEMPTION PRICE
------ ----------------
<S> <C>
September 29, 2002 through September 28, 2003............... 106.125%
September 29, 2003 through September 28, 2004............... 105.250%
September 29, 2004 through September 28, 2005............... 104.375%
September 29, 2005 through September 28, 2006............... 103.500%
September 29, 2006 through September 28, 2007............... 102.625%
September 29, 2007 through September 28, 2008............... 101.750%
Thereafter.................................................. 100.875%
</TABLE>
If fewer than all of the Notes are to be redeemed, the Trustee will select
the Notes to be redeemed in principal amounts at maturity of $1,000 or integral
multiples thereof by lot, pro rata or by another method the Trustee considers
fair and appropriate. If a portion of a holder's Notes is selected for partial
redemption and that holder converts a portion of those Notes prior to the
redemption, the converted portion shall be deemed, solely for purposes of
determining the aggregate principal amount of the Notes to be redeemed by the
Company, to be of the portion selected for redemption.
CHANGE IN CONTROL PERMITS PURCHASE OF NOTES AT THE OPTION OF THE HOLDER
In the event of any Change in Control (as defined below) of the Company,
each holder of Notes will have the right, at the holder's option, subject to the
terms and conditions of the Indenture, to require us to purchase all or any part
(provided that the principal amount must be $1,000 or an integral multiple
thereof) of the holder's Notes on the date that is 30 business days after the
occurrence of such Change in Control (the 'Change in Control Purchase Date') at
a
S-54
<PAGE>
cash price equal to 100% of the principal amount of such holder's Notes plus
accrued cash interest to the Change in Control Purchase Date (the 'Change in
Control Purchase Price').
Within 15 business days after the Change in Control, we will mail to the
Trustee and to each holder (and to beneficial owners as required by applicable
law) a notice regarding the Change in Control, which notice shall state, among
other things:
(1) the date of such Change in Control and, briefly, the events causing
such Change in Control,
(2) the date by which the Change in Control Purchase Notice (as defined
below) must be given,
(3) the Change in Control Purchase Date,
(4) the Change in Control Purchase Price,
(5) the name and address of the Paying Agent and the Conversion Agent,
(6) the Conversion Rate and any adjustments thereto,
(7) the procedures that holders must follow to exercise these rights,
(8) the procedures for withdrawing a Change in Control Purchase Notice,
(9) that holders who want to convert Notes must satisfy the requirements
set forth in the Notes and
(10) briefly, the conversion rights of holders of Notes.
We will cause a copy of such notice to be published in The Wall Street Journal
or another daily newspaper of national circulation.
To exercise the purchase right, the holder must deliver written notice of
the exercise of such right (a 'Change in Control Purchase Notice') to the Paying
Agent or an office or agency maintained by us for such purpose in the Borough of
Manhattan, The City of New York, prior to the close of business, on the Change
in Control Purchase Date. Any Change in Control Purchase Notice must state
(1) the certificate numbers of the Notes to be delivered by the holder
thereof for purchase by us,
(2) the portion of the principal amount of Notes to be purchased, which
portion must be $1,000 or an integral multiple thereof, and
(3) that such Notes are to be purchased by us pursuant to the applicable
provisions of the Notes.
Any Change in Control Purchase Notice may be withdrawn by the holder by a
written notice of withdrawal delivered to the Paying Agent prior to the close of
business on the Change in Control Purchase Date. The notice of withdrawal shall
state the principal amount and the certificate numbers of the Notes as to which
the withdrawal notice relates and the principal amount, if any, which remains
subject to a Change in Control Purchase Notice.
Payment of the Change in Control Purchase Price for a Note for which a
Change in Control Purchase Notice has been delivered and not withdrawn is
conditioned upon delivery of the Note (together with necessary endorsements) to
the Paying Agent or an office or agency maintained by us for such purpose in the
Borough of Manhattan, The City of New York, at any time (whether prior to, on or
after the Change in Control Purchase Date) after the delivery of such Change in
Control Purchase Notice. Payment of the Change in Control Purchase Price for the
Note will be made promptly following the later of the business day following the
Change in Control Purchase Date and the time of delivery of the Note. If the
Paying Agent holds, in accordance with the terms of the Indenture, money
sufficient to pay the Change in Control Purchase Price of such Note on the
business day following the Change in Control Purchase Date, then, immediately
after the Change in Control Purchase Date, such Note will cease to be
outstanding and interest on such Note will cease to accrue and will be deemed
paid, whether or not such Note is delivered to the
S-55
<PAGE>
Paying Agent, and all other rights of the holder shall terminate (other than the
right to receive the Change in Control Purchase Price upon delivery of such
Note).
Under the Indenture, a 'Change in Control' of the Company is deemed to have
occurred upon the occurrence of any of the following events:
(1) any 'person' or 'group' (as such terms are used in Sections 13(d) and
14(d) of the Exchange Act), other than Permitted Holder, is or becomes
the 'beneficial owner' (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that a Person shall be deemed to have 'beneficial
ownership' of all securities that such Person has the right to acquire,
whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of more than 40% of the total
outstanding voting stock of the Company;
(2) the Company consolidates with, or merges with or into another Person or
conveys, transfers, leases or otherwise disposes of all or
substantially all of the Company's assets to any Person, or any Person
consolidates with or merges with or into the Company, in any such event
pursuant to a transaction in which the outstanding voting stock of the
Company is converted into or exchanged for cash, securities or other
property, other than any such transaction where:
(a) the voting stock of the Company is not converted or exchanged at
all (except to the extent necessary to reflect a change in our
jurisdiction of incorporation) or is converted into or exchanged
for (i) voting stock (other than Redeemable Capital Stock) of the
surviving or transferee corporation or (ii) voting stock (other
than Redeemable Capital Stock) of the surviving or transferee
corporation and cash, securities and other property (other than
capital stock of the surviving entity) in an amount that could be
paid by the Company as a Restricted Payment in accordance with the
provisions discussed under the 'Limitation on Restricted Payments'
covenant contained in the Indenture (the 'Senior Secured Notes
Indenture') dated as of May 15, 1999, governing the Company's
14 1/2% Senior Secured Notes due 2009, and
(b) immediately after such transaction, no 'person' or 'group' (as such
terms are used in Sections 13(d) and 14(d) of the Exchange Act) is
the 'beneficial owner' (as defined in Rules 13d-3 and 13d-5 under
the Exchange Act, except that a Person shall be deemed to have
'beneficial ownership' of all securities that such Person has the
right to acquire, whether such right is exercisable immediately or
only after the passage of time), directly or indirectly, of more
than 40% of the total outstanding voting stock of the surviving or
transferee corporation;
(3) during any consecutive two-year period, individuals who at the
beginning of such period constituted the Company's Board of Directors
(together with any new directors whose election to such Board of
Directors, or whose nomination for election by the Company's
stockholders, was approved by a vote of 66 2/3% of the directors then
still in office who were either directors at the beginning of such
period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the
Company's Board of Directors then in office; or
(4) the Company is liquidated or dissolved or a special resolution is
passed by the Company's stockholders approving the plan of liquidation
or dissolution other than in a transaction which complies with the
provisions described under ' -- Consolidation, Merger and Sale or Lease
of Assets.'
'Redeemable Capital Stock' means any class or series of capital stock that,
either by its terms, by the terms of any security into which it is convertible
or exchangeable or by contract or otherwise, is, or upon the happening of an
event or passage of time would be, required to be redeemed prior to the final
stated maturity of the Notes or is redeemable at the option of the holder
thereof at any time prior to such final stated maturity, or is convertible into
or exchangeable for debt securities at any time prior to such final stated
maturity; provided, however, that Redeemable Capital Stock shall not include any
common stock the holder of which has a right to put to us
S-56
<PAGE>
upon certain terminations of employment; and provided further, however, that any
class or series of capital stock that would not constitute Redeemable Capital
Stock but for provisions thereof giving holder thereof the right to require the
issuer of such capital stock to repurchase or redeem such capital stock upon the
occurrence of an 'asset sale' or 'change of control' occurring prior to the
final stated maturity of the Notes shall not constitute Redeemable Capital Stock
if the 'asset sale' or 'change of control' provisions applicable to such class
or series of capital stock are no more favorable to the holders of such capital
stock in any material respect than the provisions of the 'Limitation on Sale of
Assets' covenant contained in the Senior Secured Notes Indenture and the
provisions contained herein under this caption and such class or series of
capital stock specifically provides that the issuer of such capital stock will
not repurchase or redeem any such stock pursuant to such provision prior to our
repurchase of such notes issued under the Senior Secured Notes Indenture as are
required to be purchased pursuant to the 'Limitation on Sale of Assets' covenant
contained in the Senior Secured Notes Indenture or our repurchase of such notes
as required pursuant to the provisions contained herein under this caption, as
applicable.
The Indenture does not permit the Board of Directors to waive our
obligation to purchase Notes at the option of a holder in the event of a Change
in Control of our Company.
We will comply with the provisions of Rule 13e-4, Rule 14e-1 and any other
tender offer rules under the Exchange Act which may then be applicable, and will
file Schedule 13E-4 or any other schedule required thereunder in connection with
any offer by us to purchase Notes at the option of the holders thereof upon a
Change in Control. In certain circumstances, the Change in Control purchase
feature of the Notes may make more difficult or discourage a takeover of our
company and, thus, the removal of incumbent management. The Change in Control
purchase feature, however, is not the result of management's knowledge of any
specific effort to accumulate shares of common stock or to obtain control of our
company by means of a merger, tender offer, solicitation or otherwise, or part
of a plan by management to adopt a series of anti-takeover provisions. Instead,
the Change in Control purchase feature is the result from negotiations between
us and the Underwriters.
If a Change in Control were to occur, there can be no assurance that we
would have funds sufficient to pay the Change in Control Purchase Price for all
of the Notes that might be delivered by holders seeking to exercise the purchase
right, because we or our subsidiaries might also be required to prepay certain
indebtedness or obligations having financial covenants with change of control
provisions in favor of the holders thereof. In addition, our other indebtedness
may have cross-default provisions that could be triggered by a default under the
Change in Control provisions thereby possibly accelerating the maturity of such
indebtedness. In such case, the holders of the Notes would be subordinated to
the prior claims of the holders of such indebtedness. In addition, our ability
to purchase Notes with cash may be limited by the terms of our then-existing
borrowing agreements. No Notes may be purchased pursuant to the provisions
described above if there has occurred and is continuing an Event of Default
described under ' -- Events of Default, Notice and Waiver' below (other than a
default in the payment of the Change in Control Purchase Price with respect to
such Notes).
CONSOLIDATION, MERGER AND SALE OR LEASE OF ASSETS
We, without the consent of any holders of outstanding Notes, are entitled
to consolidate with or merge into or transfer or lease our assets substantially
as an entirety to, any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof (each
a 'Person'), and any Person is entitled to consolidate with or merge into, or
transfer or lease its assets substantially as an entirety to us, provided that:
(1) the Person (if other than us) formed by such consolidation or into
which we are merged or the Person which acquires or leases our assets
substantially as an entirety is a corporation, partnership, limited
liability company or trust organized and existing under the laws of any
United States jurisdiction and expressly assumes our obligations on the
Notes and under the Indenture,
S-57
<PAGE>
(2) immediately after giving effect to such transaction no Event of Default
(as defined below), and no event which, after notice or lapse of time
or both, would become an Event of Default, happened and is continuing,
and
(3) certain other conditions described in the Indenture are met.
EVENTS OF DEFAULT; NOTICE AND WAIVER
The Indenture provides that, if an Event of Default specified therein
occurs and is continuing, either the Trustee or the holders of not less than 25%
in aggregate principal amount of the Notes then outstanding may declare the
principal amount of and accrued interest to the date of such declaration on all
the Notes to be immediately due and payable. In the case of certain events of
bankruptcy or insolvency, the principal amount of and accrued interest on all
the Notes to the date of the occurrence of such event shall automatically become
and be immediately due and payable. Upon any such acceleration, the
subordination provisions of the Indenture preclude any payment being made to
holders of Notes until the earlier of:
(1) 120 days or more after the date of such acceleration and
(2) the payment in full of all Senior Indebtedness,
but only if such payment is then otherwise permitted under the terms of the
Indenture. See ' -- Subordination of Notes' above.
Under certain circumstances, the holders of a majority in aggregate
principal amount of the outstanding Notes may rescind any such acceleration with
respect to the Notes and its consequences. Interest shall accrue and be payable
on demand upon a default in the payment of principal interest when due,
Redemption Price, Change in Control Purchase Price or shares of common stock (or
cash in lieu of fractional shares) to be delivered on conversion of Notes, in
each case to the extent that the payment of such interest shall be legally
enforceable.
Under the Indenture, Events of Default include:
(1) default in payment of the principal amount, interest when due (if such
default in payment of interest shall continue for 31 days), Redemption
Price, or Change in Control Purchase Price with respect to any Note,
when the same becomes due and payable (whether or not any such payment
is prohibited by the provisions of the Indenture);
(2) failure by the Company to deliver shares of common stock (together with
cash in lieu of fractional shares) when such common stock (or cash in
lieu of fractional shares) is required to be delivered following
conversion of a Note and continuation of such default for 10 days;
(3) failure by the Company to comply with any of its other agreements in
the Notes or the Indenture upon the receipt by the Company of notice of
such default from the Trustee or from holders of not less than 25% in
aggregate principal amount of the Notes then outstanding and the
Company's failure to cure such default within 90 days after receipt by
the Company of such notice;
(4) default under any bond, note or other evidence of indebtedness for
money borrowed of the Company having an aggregate outstanding principal
amount of in excess of $10 million, which default shall have resulted
in such indebtedness being accelerated, without such indebtedness being
discharged or such acceleration having been rescinded or annulled
within 20 days after receipt of notice thereof by the Company from the
Trustee or the Company and the Trustee from the holders of not less
than 25% in aggregate principal amount of the Notes then outstanding
(unless such default has been cured or waived); or
(5) certain events of bankruptcy or insolvency.
The Trustee will, within 90 days after the occurrence of any default, mail
to all holders of the Notes notice of all defaults of which the Trustee shall be
aware, unless such defaults shall have been cured or waived before the giving of
such notice; provided that the Trustee may withhold
S-58
<PAGE>
such notice as to any default other than a payment default, if it determines in
good faith that withholding the notice is in the interests of the holders.
The holders of a majority in aggregate principal amount of the outstanding
Notes may direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
the Trustee, provided that such direction shall not be in conflict with any law
or the Indenture and subject to certain other limitations. The Trustee may
refuse to perform any duty or exercise any right or power or extend or risk its
own funds or otherwise incur any financial liability unless it receives
indemnity satisfactory to it against any loss, liability or expense. No holder
of any Note will have any right to pursue any remedy with respect to the
Indenture or the Notes, unless:
(1) such holder shall have previously given the Trustee written notice of a
continuing Event of Default;
(2) the holders of at least 25% in aggregate principal amount of the
outstanding Notes shall have made a written request to the Trustee to
pursue such remedy;
(3) such holder or holders shall have offered to the Trustee reasonable
security or indemnity against any loss, liability or expense
satisfactory to it;
(4) the Trustee shall have failed to comply with the request within
60 days after receipt of such notice, request and offer of security or
indemnity; and
(5) the holders of a majority in aggregate principal amount of the
outstanding Notes shall not have given the Trustee a direction
inconsistent with such request within 60 days after receipt of such
request.
The right of any holder (a) to receive payment of principal, the Redemption
Price, Change in Control Purchase Price or interest in respect of the Notes held
by such holder on or after the respective due dates expressed in the Notes,
(b) to convert such Notes, or (c) to bring suit for the enforcement of any such
payment on or after such respective dates or the right to convert, shall not be
impaired or adversely affected without such holder's consent.
The holders of a majority in aggregate principal amount of Notes at the
time outstanding may waive any existing default and its consequences except:
(1) any default in any payment on the Notes,
(2) any default with respect to the conversion rights of the Notes, or
(3) any default in respect of certain covenants or provisions in the
Indenture which may not be modified without the consent of the holder
of each Note as described in ' -- Modification' below.
When a default is waived, it is deemed cured and will cease to exist, but no
such waiver shall extend to any subsequent or other default or impair any
consequent right.
We will be required to furnish to the Trustee annually a statement as to
any default by the Company in the performance and observance of our obligations
under the Indenture. In addition, we will be required to file with the Trustee
written notice of the occurrence of any default or Event of Default within five
business days of our becoming aware of such default or Event of Default.
MODIFICATION
The Indenture or the Notes may be modified or amended by the Company and
the Trustee with the consent of the holders of not less than a majority in
aggregate principal amount of the Notes then outstanding. However, without the
consent of each holder affected thereby, no amendment may, among other things:
(1) reduce the principal amount, Change in Control Purchase Price or
Redemption Price with respect to any Note, or extend the stated
maturity of any Note or alter the manner of payment or rate of interest
on any Note or make any Note payable in money or securities other than
that stated in the Note;
S-59
<PAGE>
(2) make any reduction in the principal amount of Notes whose holders must
consent to an amendment or any waiver under the Indenture or modify the
Indenture provisions relating to such amendments or waivers;
(3) make any change that adversely affects the right of a holder to convert
any Note;
(4) modify the provisions of the Indenture relating to the ranking of the
Notes in a manner adverse to the holders of the Notes; or
(5) impair the right to institute suit for the enforcement of any payment
with respect to, or conversion of, the Notes.
Without the consent of any holder of Notes, the Company and the Trustee may
amend the Indenture to:
(1) cure any ambiguity, defect or inconsistency, provided, however, that
such amendment does not materially adversely affect the rights of any
holder of Notes,
(2) provide for the assumption by a successor to the Company of the
obligations of the Company under the Indenture,
(3) provide for uncertificated Notes in addition to certificated Notes, as
long as such uncertificated Notes are in registered form for United
States federal income tax purposes,
(4) make any change that does not adversely affect the rights of any holder
of Notes,
(5) make any change to comply with any requirement of the Commission in
connection with the qualification of the Indenture under the Trust
Indenture Act of 1939, as amended, or
(6) add to the covenants or obligations of the Company under the Indenture
for the protection of holders of the Notes or surrender any right,
power or option conferred by the Indenture on the Company.
DISCHARGE OF THE INDENTURE
We may satisfy and discharge our obligations under the Indenture by
delivering to the Trustee for cancellation all outstanding Notes or by
depositing with the Trustee, the Paying Agent or the Conversion Agent, if
applicable, after the Notes have become due and payable, whether at stated
maturity, or any Redemption Date, or any Purchase Date, or a Change of Control
Purchase Date, or upon conversion or otherwise, cash sufficient to pay all of
the outstanding Notes and paying all other sums payable under the Indenture by
the Company.
NO RECOURSE AGAINST OTHERS
The Indenture provides that a director, officer, employee or stockholder,
as such, of the Company shall not have any liability for any obligations of the
Company under the Notes or the Indenture or for any claim based on, in respect
of or by reason of such obligations or their creation.
INFORMATION CONCERNING THE TRUSTEE
U.S. Trust Company of Texas, N.A. is the Trustee, Registrar, Paying Agent
and Conversion Agent under the Indenture.
S-60
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
14 1/2% SENIOR SECURED NOTES DUE 2009
The senior secured notes were originally issued on May 18, 1999, will
mature on May 15, 2009 and are secured by a first priority perfected security
interest in all the issued and outstanding stock of Satellite CD Radio, Inc.,
our wholly owned subsidiary (the 'Pledged Stock'), which pledge ranks equally
with the pledge of the stock to secure our obligations in respect of the senior
secured discount notes. In addition, at the time we issued the senior secured
notes, we applied approximately $79.3 million of the net proceeds to purchase,
and we pledged to the trustee for the senior secured notes in escrow for the
benefit of the holders of these notes, a portfolio of U.S. government securities
in an amount sufficient to pay the first six payments of interest on these
notes. We will pay interest on our senior secured notes on May 15 and November
15 of each year, commencing November 15, 1999, at a rate of 14 1/2% per annum
until May 15, 2009. The senior secured notes indenture does not provide for a
sinking fund.
Except as described below, the senior secured notes are not redeemable
before May 15, 2004. After that date, the senior secured notes are redeemable,
in whole or in part, at our option, at the redemption prices described in the
senior secured notes indenture, plus accrued interest to the applicable
redemption date. Specifically, if redeemed during the 12-month period beginning
on May 15 of the years shown below, the redemption price will be that amount,
expressed as a percentage of the principal amount of the senior secured notes,
shown below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---- -----
<S> <C>
2004..................................................... 107.250%
2005..................................................... 104.833%
2006..................................................... 102.417%
2007 and thereafter...................................... 100.000%
</TABLE>
In addition, at any time or from time to time before May 15, 2002, we are
entitled to redeem up to 35% of the principal amount of the senior secured notes
with the net proceeds of one or more offerings of our equity securities at a
redemption price (expressed as a percentage of principal amount on the
redemption date) of 114.50% plus accrued interest to the redemption date.
If there is a Change of Control (as defined in the senior secured notes
indenture) or asset sales in specific circumstances, we will be required by the
terms of the senior secured notes indenture to make an offer to purchase the
outstanding senior secured notes at a purchase price equal to 101% of the
principal amount of the senior secured notes, plus accrued interest to the date
of purchase.
The indebtedness evidenced by the senior secured notes ranks equally in
right of payment with all of our other existing and future unsubordinated
indebtedness and senior in right of payment to all of our existing and future
obligations expressly subordinated in right of payment to the senior secured
notes.
The senior secured notes indenture contains a number of covenants
restricting our operations and the operations of our subsidiaries, including
those restricting the incurrence of indebtedness; the making of restricted
payments (in the form of the declaration or payment of some kinds of dividends
or distributions, the purchase, redemption or other acquisition of any of our
capital stock, the voluntary prepayment of equal or subordinated indebtedness
and the making of some kinds of investments, loans and advances); transactions
with affiliates; the issuance of liens; sale-leaseback transactions; the
transfer of assets; issuances and sales of capital stock of subsidiaries; the
issuance of guarantees by subsidiaries; dividend and other payment restrictions
affecting subsidiaries; and consolidation, merger or sale of substantially all
of our assets.
The events of default under the senior secured notes indenture include
provisions that are typical of senior debt financings, including a
cross-acceleration to a default by CD Radio or any material subsidiary on any
indebtedness that has an aggregate principal amount in excess of $10
S-61
<PAGE>
million. Upon the occurrence of an event of default, the trustee or the holders
of not less than 25% in principal amount at maturity of the outstanding senior
secured notes may immediately accelerate the maturity of all the senior secured
notes as provided in the senior secured notes indenture.
15% SENIOR SECURED DISCOUNT NOTES DUE 2007
The senior secured discount notes were originally issued on November 27,
1997, will mature on December 1, 2007 and are secured by the Pledged Stock,
which pledge ranks equally with the pledge of the stock to secure CD Radio's
obligations in respect of the notes. The senior secured discount notes accrue
the original issue discount at a rate of 15% per annum until December 1, 2002,
and thereafter will bear interest at the same rate, payable in cash semiannually
in arrears. The senior secured discount notes indenture does not provide for a
sinking fund.
The senior secured discount notes are not redeemable before December 1,
2002. Thereafter, the senior secured discount notes are redeemable, in whole or
in part, at our option, at the redemption prices described in the senior secured
discount notes indenture, plus accrued interest to the applicable redemption
date. Specifically, if redeemed during the 12-month period commencing on
December 1 of the years shown below, the redemption price will be that amount,
expressed as a percentage of the principal amount of the senior secured discount
notes, shown below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---- -----
<S> <C>
2002..................................................... 112.5%
2003..................................................... 110.0%
2004..................................................... 107.5%
2005..................................................... 105.0%
2006..................................................... 102.5%
</TABLE>
If there is a Change of Control (as defined in the senior secured discount
notes indenture) or asset sales in specific circumstances, we will be required
by the terms of the senior secured discount notes indenture to make an offer to
purchase the outstanding senior secured discount notes at a purchase price equal
to 101% of the accrued value of the senior secured discount notes, plus accrued
interest to the date of purchase.
The indebtedness evidenced by the senior secured discount notes ranks
equally in right of payment with all of our other existing and future
unsubordinated indebtedness (including the notes we are offering) and senior in
right of payment to all of our existing and future obligations expressly
subordinated in right of payment to the senior secured discount notes.
The senior secured discount notes indenture contains a number of covenants
restricting our operations and the operations of our subsidiaries, including
those restricting the incurrence of indebtedness; the making of restricted
payments (in the form of the declaration or payment of some kinds of dividends
or distributions, the purchase, redemption or other acquisition of any of our
capital stock, the voluntary prepayment of equal or subordinated indebtedness
and the making of some kinds of investments, loans and advances); transactions
with affiliates; the issuance of liens; sale-leaseback transactions; the
transfer of assets; issuances and sales of capital stock of subsidiaries; the
issuance of guarantees by subsidiaries; dividend and other payment restrictions
affecting subsidiaries; and consolidation, merger or sale of substantially all
of our assets.
The events of default under the senior secured discount notes indenture
include provisions that are typical of senior debt financings, including a
cross-acceleration to a default by CD Radio or any material subsidiary on any
indebtedness that has an aggregate principal amount in excess of $5 million.
Upon the occurrence of an event of default, the trustee or the holders of not
less than 25% in principal amount at maturity of the outstanding senior secured
discount notes may immediately accelerate the maturity of all the senior secured
discount notes as provided in the senior secured discount notes indenture.
S-62
<PAGE>
VENDOR FINANCING
Pursuant to the Tranche A Facility, Bank of America and other financial
institutions have committed to provide us a term loan facility in the aggregate
principal amount of up to $115 million. The proceeds of the loans are being used
by us to fund a portion of the progress payments required to be made under the
Loral Satellite Contract for the purchase of launch services and to pay
interest, fees and other expenses related to the Tranche A Facility. The loans
are due on the earlier of February 29, 2000 and ten days before the launch of
our second satellite and bear interest, at our option, at either (1) the London
Interbank Offered Rate plus 1.75% or (2) the higher of (a) the rate publicly
announced by Bank of America as its reference rate and (b) 0.50% per annum above
the Federal Funds Rate then in effect. The loans are secured by the grant of a
security interest in the portion of the Loral Satellite Contract relating to
launch services. The Tranche A Facility also contains covenants relating to
financial information, the conduct of our business, payments under the Loral
Satellite Contract, maintenance of governmental and other approvals, maintenance
of existence and qualifications, maintenance of books and records, maintenance
of property and insurance, compliance with laws and notice of defaults. In
addition, the terms of the Tranche A Facility require us to maintain a minimum
net worth and sufficient cash. As of June 30, 1999, we had borrowed $95.5
million under the Tranche A Facility, substantially all of which was used to
make progress payments under the Loral Satellite Contract.
Loral assisted us in arranging the Tranche A Facility. Specifically, Loral
has agreed that at maturity of the loans (including maturity as a result of an
acceleration), upon the occurrence of a bankruptcy of CD Radio or upon the
occurrence of an event of default by Loral Space under its agreement with Bank
of America, Loral Space & Communications Ltd. will repurchase from Bank of
America and the other Lenders the loans at a price equal the principal amount of
the loans plus accrued and unpaid interest. In exchange for providing this
credit support, we pay Loral Space & Communications Ltd. a fee equal to 1.25%
per annum of the outstanding amount of the loans from time to time.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain United States federal income
tax considerations that may be relevant to the purchase, ownership and
disposition of the notes and the common stock into which the notes may be
converted, but does not purport to be a complete analysis of all the potential
tax considerations relating thereto. This summary deals only with holders that
are U.S. Persons (as defined below) that will hold notes and common stock as
capital assets and does not address tax considerations applicable to investors
that may be subject to special tax rules such as dealers in securities,
financial institutions, insurance companies, tax-exempt entities, persons
holding the notes as part of a hedging or conversion transaction, a straddle or
a constructive sale, persons whose functional currency is not the United States
dollar, and holders of notes that did not acquire the notes in the initial
distribution thereof at their original issue price. In addition, this discussion
does not consider the effect of any estate, gift or other tax laws.
As used herein, 'United States Person' means a beneficial owner of the
notes or the common stock into which the notes may be converted, who or that (1)
is a citizen or resident of the United States, (2) is a corporation or other
entity taxable as a corporation created or organized in or under the laws of the
United States or political subdivision thereof, (3) is an estate the income of
which is subject to U.S. federal income taxation regardless of its source,
(4) is a trust if (A) a U.S. court is able to exercise supervision over the
administration of the trust and (B) one or more U.S. fiduciaries have authority
to control all substantial decisions of the trust, or (5) is otherwise subject
to U.S. federal income tax on a net income basis in respect of the notes or the
common stock, as the case may be.
THE DISCUSSION OF THE UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS BELOW
IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE CODE, THE APPLICABLE TREASURY
REGULATIONS PROMULGATED AND PROPOSED UNDER THE CODE, JUDICIAL DECISIONS AND
ADMINISTRATIVE INTERPRETATIONS, ALL OF WHICH ARE SUBJECT TO CHANGE, POSSIBLY ON
A RETROACTIVE BASIS. BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER YOU ARE
STRONGLY URGED TO CONSULT YOUR TAX ADVISOR WITH RESPECT TO YOUR PARTICULAR TAX
SITUATION AND THE
S-63
<PAGE>
PARTICULAR TAX EFFECTS OF ANY STATE, LOCAL, NON-UNITED STATES OR OTHER TAX LAWS
AND POSSIBLE CHANGES IN THE TAX LAWS.
NOTES
Stated Interest. A holder will be required to include in gross income the
stated interest on a note at the time that such interest accrues or is received,
in accordance with the holder's regular method of accounting for federal income
tax purposes.
Market Discount. If a note is acquired by a subsequent holder at a 'market
discount,' some or all of any gain realized upon a disposition (including a sale
or a taxable exchange) or payment at maturity of such note may be treated as
ordinary income. 'Market discount' with respect to a security is, subject to a
de minimis exception, the excess of (1) the stated redemption price at maturity
of the security over (2) such holder's initial tax basis in the security. The
amount of market discount treated as having accrued will be determined either on
a ratable basis, or, if the holder so elects, on a constant interest method.
Upon any subsequent disposition (including a gift or payment at maturity) of the
note (other than in connection with some nonrecognition transactions), the
lesser of any gain on such disposition (or appreciation, in the case of a gift)
or the portion of the market discount that accrued while the note was held by
such holder will be treated as ordinary interest income at the time of the
disposition. In lieu of including accrued market discount in income at the time
of the disposition, a holder may elect to include market discount in income
currently. Unless a holder so elects, such holder may be required to defer a
portion of any interest expenses that may otherwise be deductible on any
indebtedness incurred or maintained to purchase or carry such note until the
holder disposes of the note. The election to include market discount in income
currently, once made, applies to all market discount obligations acquired on or
after the first day of the first taxable year to which the election applies and
may not be revoked without the consent of the Internal Revenue Service.
Sale, Exchange or Retirement of the Notes. A holder's tax basis in a note
will be its cost. A holder generally will recognize gain or loss on the sale,
exchange or retirement (including a redemption by the Company) of a note in an
amount equal to the difference between the amount of cash plus the net fair
market value of any property received, other than any such amount received in
respect of accrued interest (which will be taxable as such if not previously
included in income), and the holder's tax basis in the note. Gain or loss
recognized on the sale, exchange or retirement of a note generally will be a
capital gain or loss. In the case of a noncorporate holder, the federal tax rate
applicable to capital gains will depend upon the holder's holding period for the
notes, with a preferential rate available for notes held for more than one year,
and upon the holder's marginal tax rate for ordinary income. The deductibility
of capital losses is subject to limitations.
CONVERSION OF THE NOTES
A holder generally will not recognize any income, gain, or loss upon
conversion of a note into common stock (except with respect to cash received in
lieu of a fractional share of common stock). Such holder's basis in the common
stock received on conversion of a note will be the same as such holder's tax
basis in the note at the time of conversion (reduced by any basis allocable to a
fractional share interest as described below), and the holding period for the
common stock received on conversion will include the holding period of the note
converted.
Cash received in lieu of a fractional share of common stock will be treated
as a payment in exchange for the fractional share interest in the common stock.
Accordingly, the receipt of cash in lieu of a fractional share of common stock
will generally result in capital gain or loss (measured by the difference
between the cash received for the fractional share and the holder's basis in the
fractional share).
S-64
<PAGE>
CONSTRUCTIVE DIVIDENDS
If at any time (a) the Company makes a distribution to its stockholders or
purchases common stock in a tender offer and such distribution or purchase would
be taxable to such stockholders as a dividend for United States federal income
tax purposes (e.g., distributions of evidences of indebtedness or assets of the
Company, but generally not stock dividends or rights to subscribe for common
stock) and, pursuant to the antidilution provisions of the notes, the Conversion
Rate of the notes is increased, or (b) the Conversion Rate of the notes is
increased at the discretion of the Company, such increase may be deemed to be
the payment of a taxable dividend to holders or beneficial owners of notes
(pursuant to Section 305 of the Code). Holders of notes therefore could have
taxable income as a result of an event in which they received no cash or
property. Similarly, a failure to adjust the Conversion Rate to reflect a stock
dividend or other event increasing the proportionate interest of the holders of
outstanding common stock could, in some circumstances, give rise to deemed
dividend income to holders of such common stock.
DIVIDENDS ON COMMON STOCK
Dividends paid on common stock generally will be includible in the income
of a holder as ordinary income to the extent of the Company's current or
accumulated earnings and profits. Subject to certain limitations, a corporate
taxpayer holding common stock that receives dividends thereon generally will be
eligible for a dividends-received deduction equal to 70% of the dividends
received.
SALE, EXCHANGE OR REDEMPTION OF COMMON STOCK
Upon the sale, exchange or redemption of common stock, a holder generally
will recognize capital gain or loss equal to the difference between the amount
realized on the sale, exchange or redemption and the holder's adjusted basis in
the common stock. In the case of a noncorporate holder, the federal tax rate
applicable to capital gains will depend upon the holder's holding period for the
common stock, with a preferential rate available for common stock held for more
than one year, and upon the holder's marginal tax rate for ordinary income. The
deductibility of capital losses is subject to limitations.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
In general, information reporting requirements will apply to payments of
principal, premium, if any, and interest on a note, payments of actual or
constructive dividends on common stock, and payment of the proceeds of the sale
of a note or common stock to certain non-corporate, not otherwise exempt
holders, and a 31% backup withholding tax may apply to such payments if the
holder (i) fails to furnish or certify its correct taxpayer identification
number to the payor in the manner required, (ii) is notified by the Internal
Revenue Service that it has failed to report payments of interest and dividends
properly, or (iii) under certain circumstances, fails to certify, under
penalties of perjury, that it has not been notified by the Internal Revenue
Service that it is subject to backup withholding for failure to report interest
and dividend payments. Any amounts withheld under the backup withholding rules
from a payment to a holder will be allowed as a credit against such holder's
United States federal income tax liability and may entitle the holder to a
refund.
THE ABOVE SUMMARY DOES NOT DISCUSS ALL ASPECTS OF FEDERAL INCOME TAXATION
THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF NOTES IN LIGHT OF HIS OR HER
PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. EACH HOLDER OF NOTES SHOULD
CONSULT ITS TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO THE HOLDER OF THE
OWNERSHIP AND DISPOSITION OF THE NOTES INCLUDING THE APPLICATION AND EFFECT OF
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS, OR SUBSEQUENT REVISIONS OF THESE TAX
LAWS.
S-65
<PAGE>
UNDERWRITING
GENERAL
Merrill Lynch, Pierce, Fenner & Smith Incorporated ('Merrill Lynch') is
acting as representative (the 'Representative') of each of the underwriters
named below (the 'Underwriters'). Subject to the terms and conditions set forth
in a purchase agreement among us and the Underwriters, we have agreed to sell to
the Underwriters, and each of the Underwriters, severally and not jointly, has
agreed to purchase from us, the aggregate principal amount of Notes set forth
opposite its name below.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITER OF NOTES
----------- ----------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................. $62,500,000
Lehman Brothers Inc......................................... 25,000,000
Bear, Stearns & Co. Inc..................................... 20,312,000
Banc of America Securities LLC.............................. 17,188,000
------------
Total......................................... $125,000,000
------------
------------
</TABLE>
In the purchase agreement the several Underwriters have agreed, subject to
the terms and conditions set forth in that agreement, to purchase all of the
Notes being sold under the terms of each such agreement if any of the Notes
being sold under the terms of that agreement are purchased. In the event of a
default by an Underwriter, the purchase agreement provides that, in certain
circumstances, the underwriting commitments of the nondefaulting underwriters
may be increased or the purchase agreement may be terminated.
We have agreed to indemnify the Underwriters against some liabilities,
including some liabilities under the Securities Act, or to contribute to
payments the Underwriters may be required to make in respect of those
liabilities.
The Notes are being offered by the several Underwriters, subject to prior
sale, when, as and if issued to and accepted by them, subject to approval of
certain legal matters by counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part.
Concurrently with this offering and the offering of the common stock,
Merrill Lynch and Loral Space & Communications will make arrangements for
Merrill Lynch to borrow up to approximately 1.9 million shares of our common
stock from Loral Space & Communications from time to time in private, but
arm's-length, transactions. Loral Space & Communications will be compensated for
the loan of this common stock and the arrangements will reflect other customary
market provisions. The common stock may be used by Merrill Lynch from time to
time to facilitate short sale transactions made by customers of Merrill Lynch in
connection with their hedging transactions and also by Merrill Lynch in the
course of its market-making activity. Merrill Lynch is not under any obligation
to engage in market-making activity with respect to the Notes and any
market-making actually engaged in by Merrill Lynch may cease at any time.
COMMISSIONS AND DISCOUNTS
The Representative has advised us that the Underwriters propose initially
to offer the Notes to the public at the public offering price set forth on the
cover page of this prospectus supplement and to certain dealers at such price
less a concession not in excess of 1.8% per Note. The Underwriters may allow,
and such dealers may reallow, a discount not in excess of .25% per Note to
certain other dealers. After the initial public offering, the public offering
price, concession and discount may be changed.
The following table shows the per Note and total public offering price,
underwriting discount to be paid by us to the Underwriters and the proceeds
before expenses to us. This information is
S-66
<PAGE>
presented assuming either no exercise or full exercise by the Underwriters of
their over-allotment option.
<TABLE>
<CAPTION>
WITHOUT WITH
PER NOTE OPTION OPTION
-------- ------ ------
<S> <C> <C> <C>
Public offering price.......................... 100% $125,000,000 $143,750,000
Underwriting discount.......................... 3% $3,750,000 $4,312,500
Proceeds, before expenses, to CD Radio......... 97% $121,250,000 $139,437,500
</TABLE>
The expenses of the offering, exclusive of the underwriting discount, are
estimated at $210,000 and are payable by us.
OVER-ALLOTMENT OPTION
We have granted an option to the Underwriters, exercisable for 30 days
after the date of this prospectus supplement, to purchase up to $18,750,000 an
additional aggregate principal amount of Notes at the public offering price set
forth on the cover page of this prospectus supplement, less the underwriting
discount. The Underwriters may exercise this option solely to cover over-
allotments, if any, made on the sale of our Notes offered hereby. To the extent
that the Underwriters exercise this option, each underwriter will be obligated,
subject to certain conditions, to purchase a number of additional Notes
proportionate to such Underwriter's initial amount reflected in the foregoing
table.
NO SALES OF SIMILAR SECURITIES
We and our executive officers and directors and certain of our existing
stockholders have agreed, with certain exceptions, without the prior written
consent of Merrill Lynch on behalf of the Underwriters for a period of 90 days
after the date of this prospectus supplement, not to directly or indirectly
offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant for the sale of, lend or otherwise dispose of or transfer any
shares of our common stock or securities convertible into or exchangeable
or exercisable for or repayable with our common stock, whether now owned
or later acquired by the person executing the agreement or with respect to
which the person executing the agreement later acquires the power of
disposition, or file a registration statement under the Securities Act
relating to any shares of our common stock or
enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of our common stock whether
any such swap or transaction is to be settled by delivery of our common
stock or other securities, in cash or otherwise.
PRICE STABILIZATION AND SHORT POSITIONS
Until the distribution of the Notes is completed, rules of the Securities
and Exchange Commission may limit the ability of the Underwriters and certain
selling group members to bid for and purchase our Notes or the shares of our
common stock into which the Notes are convertible. As an exception to these
rules, the Representative is permitted to engage in transactions that stabilize
the price of our Notes or the shares of our common stock into which the Notes
are convertible. Such transactions consist of bids or purchases for the purpose
of pegging, fixing or maintaining the price of our Notes or the shares of our
common stock into which the Notes are convertible.
If the Underwriters create a short position in our Notes or common stock in
connection with the offering, i.e., if they sell a greater principal amount of
Notes than are set forth on the cover page of this prospectus supplement, the
Representative may reduce that short position by purchasing our Notes or shares
of our common stock in the open market. The Representative may also elect to
reduce any short position by exercising all or part of the over-allotment option
described above.
S-67
<PAGE>
Neither we nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our Notes or of the price of our common
stock. In addition, neither we nor any of the underwriters makes any
representation that the Representative will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
LEGAL MATTERS
Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York, has passed
upon specific legal matters with respect to the securities offered by this
prospectus supplement. Certain regulatory matters arising under the
Communications Act are being passed upon by Wiley, Rein & Fielding, Washington,
D.C. Cravath, Swaine & Moore, New York, New York, has represented the
underwriters.
S-68
<PAGE>
PROSPECTUS
$500,000,000
[LOGO]
DEBT SECURITIES, PREFERRED STOCK,
COMMON STOCK AND WARRANTS
We from time to time may offer:
unsecured or secured debt securities in one or more series;
shares of preferred stock in one or more series;
shares of common stock;
warrants or other rights to purchase debt securities, preferred stock or
common stock or any combination of securities; and
any combination of debt securities, preferred stock, common stock or warrants,
at an aggregate initial public offering price not to exceed $500,000,000.
The number, amount, prices, net proceeds to CD Radio Inc. and specific terms of
the securities will be determined at or before the time of sale and will be set
forth in an accompanying prospectus supplement.
The net proceeds to us from the sale of the securities will be the initial
public offering price or the purchase price of those securities less any
applicable commission or discount, and less any other expenses of CD Radio
associated with the issuance and distribution of those securities.
If any agents or any underwriters are involved in the sale of the foregoing
securities, their names and any applicable commission or discount will be set
forth in the accompanying prospectus supplement.
This prospectus may not be used for the sale of any securities unless it is
accompanied by a prospectus supplement. The accompanying prospectus supplement
may modify or supersede any statement in this prospectus.
Nasdaq National Market trading symbol: 'CDRD.'
INVESTING IN OUR SECURITIES INVOLVES RISKS. SEE 'RISK FACTORS' BEGINNING ON
PAGE 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
-----------------------------------
The date of this prospectus is September 23, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Special Note Regarding Forward Looking Statements........... 2
About This Prospectus....................................... 3
About CD Radio.............................................. 3
Risk Factors................................................ 4
Ratio of Earnings to Combined Fixed Charges and Preferred
Stock Dividends........................................... 16
Use of Proceeds............................................. 16
Description of Debt Securities.............................. 16
Description of Capital Stock................................ 28
Description of Warrants..................................... 43
Plan of Distribution........................................ 46
Legal Matters............................................... 47
Experts..................................................... 47
Incorporation by Reference.................................. 47
Where You May Find Additional Available Information About
Us........................................................ 48
</TABLE>
------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS PROSPECTUS MAY ONLY BE USED WHERE IT IS
LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS PROSPECTUS MAY ONLY BE
ACCURATE ON THE DATE OF THIS PROSPECTUS.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
The following cautionary statements identify important factors that could
cause our actual results to differ materially from those projected in the
forward looking statements made in this prospectus. Any statements about our
expectations, beliefs, plans, objectives, assumptions or future events or
performance are not historical facts and may be forward looking. These
statements are often, but not always, made through the use of words or phrases
such as 'will likely result,' 'are expected to,' 'will continue,' 'is
anticipated,' 'estimated,' 'intends,' 'plans,' 'projection' and 'outlook.'
Accordingly, these statements involve estimates, assumptions and uncertainties
which could cause actual results to differ materially from those expressed in
them. Any forward looking statements are qualified in their entirety by
reference to the factors discussed throughout this prospectus, and particularly
the risk factors described under 'Risk Factors' in this prospectus. Among the
significant factors that have a direct bearing on our results of operations are:
the potential risk of delay in implementing our business plan;
increased costs of construction and launch of necessary satellites;
risk of launch failure;
unproven market and unproven applications of technology;
our dependence on Space Systems/Loral, Inc. ('Loral') and Lucent
Technologies, Inc. ('Lucent');
unavailability of receivers and antennas; and
our need for additional financing.
These and other factors are discussed in 'Risk Factors' and elsewhere in
this prospectus.
Because the risk factors referred to above could cause actual results or
outcomes to differ materially from those expressed in any forward looking
statements made by us or on our behalf, you should not place undue reliance on
any of these forward looking statements. Further, any forward looking statement
speaks only as of the date on which it is made, and we undertake no obligation
to update any forward looking statement or statements to reflect events or
circumstances after the date on which the statement is made or to reflect the
occurrence of unanticipated events. New factors emerge from time to time, and it
is not possible for us to predict which will arise. In addition, we cannot
assess with any precision the impact of each factor on our business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward looking statements.
2
<PAGE>
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission using a 'shelf' registration process. Under
this shelf process, we may sell, over the next two years, any combination of the
securities described in this prospectus in one or more offerings up to a total
dollar amount of $500,000,000. This prospectus provides you with a general
description of the securities we may offer. Each time we sell securities, we
will provide a prospectus supplement that will contain specific information
about the terms of that offering. The prospectus supplement may also add, update
or change information contained in this prospectus. You should read both this
prospectus and any prospectus supplement together with the additional
information described under the heading 'Where You May Find Additional Available
Information About Us.'
ABOUT CD RADIO
We are building a digital quality radio service that will broadcast up to
100 channels directly from satellites to vehicles. CD Radio will be broadcast
throughout the continental United States over a frequency band, the 'S-band,'
that will augment traditional AM and FM radio bands. We hold one of only two
licenses issued by the FCC to build, launch and operate a national satellite
radio broadcast system. Under our FCC license, we have the exclusive use of a
12.5 MHz portion of the S-band for this purpose. Our service, which will be
primarily for motorists, will offer 50 channels of commercial-free, digital
quality music programming and up to 50 channels of news, sports, talk and
programming. We currently expect to commence CD Radio broadcasts at the end of
the fourth quarter of 2000, at an anticipated subscription price of $9.95 per
month.
CD Radio was incorporated in the State of Delaware as Satellite CD Radio,
Inc. on May 17, 1990. On December 7, 1992, we changed our name to CD Radio Inc.,
and we formed a wholly owned subsidiary, Satellite CD Radio, Inc., that is the
holder of our FCC license. Our executive offices are located at 1221 Avenue of
the Americas, New York, New York 10020, our telephone number is (212) 584-5100
and our internet address is cdradio.com. The information on our website is not
part of this prospectus.
3
<PAGE>
RISK FACTORS
In addition to the other information in this prospectus, the following risk
factors should be considered carefully in evaluating us and our business and in
deciding whether to invest in our securities.
OUR BUSINESS IS STILL IN THE DEVELOPMENT STAGE
Historically, we have generated only losses. We are a development stage
company. The service we propose to offer, CD Radio, is in a relatively early
stage of development and we have never recognized any operating revenues or
conducted any operations. Since our inception, we have concentrated on raising
capital, obtaining required licenses, developing technology, strategic planning,
market research and building our infrastructure. Our financial results from our
inception on May 17, 1990 through June 30, 1999, are as follows:
no revenues;
net losses of approximately $95 million (including net losses of
approximately $5 million during the year ended December 31, 1997 and $48
million during the year ended December 31, 1998); and
net losses applicable to common stock of approximately $206 million, which
includes a deemed dividend on our former 5% Delayed Convertible Preferred
Stock (the '5% Preferred Stock') of $52 million. In November 1997, we
exchanged 1,846,799 shares of our 10 1/2% Series C Convertible Preferred
Stock for all of the issued and outstanding shares of 5% Preferred Stock.
We do not expect any revenues before 2001, and still have a variety of
hurdles to surmount before commencing operations. We have not started to
broadcast CD Radio and do not expect to generate any revenues from operations
until the first quarter of 2001 or to generate positive cash flow from
operations until the third quarter of 2001, at the earliest. Our ability to
generate revenues, generate positive cash flow and achieve profitability will
depend upon a number of factors, including:
raising additional financing;
the timely receipt of all necessary regulatory authorizations;
the successful and timely construction and deployment of our satellite
system;
the development and manufacture by one or more consumer electronics
manufacturers of devices capable of receiving CD Radio; and
the successful marketing and consumer acceptance of CD Radio.
We cannot assure you that we will accomplish any of the above, that CD Radio
will ever commence operations, that we will attain any particular level of
revenues, that we will generate positive cash flow or that we will achieve
profitability.
WE NEED ADDITIONAL FINANCING TO BUILD AND LAUNCH OUR SERVICE
We need more money to continue implementing our business plan. We require
near-term funding to continue building our system. We believe we can fund our
planned operations and the construction of our satellite and terrestrial system
into the first quarter of 2000 from our working capital at July 31, 1999, which
includes:
the proceeds from our sale of 5,000,000 shares of common stock to Prime 66
Partners, L.P. for $100 million on November 2, 1998;
our sale of 9.2% Series A Junior Cumulative Convertible Preferred Stock to
Apollo Investment Fund IV, L.P. and Apollo Overseas Partners IV, L.P.,
which we refer to as the 'Apollo Investors,' for $135 million on
December 23, 1998; and
4
<PAGE>
the proceeds from our sale of 200,000 units, each unit consisting of
$1,000 principal amount of 14 1/2% senior secured notes due 2009 and three
warrants, each to purchase 3.65 shares of our common stock, for $200
million on May 18, 1999.
We have exercised an option granted us by the Apollo Investors to sell them
650,000 shares of our 9.2% Series B Junior Cumulative Convertible Preferred
Stock, par value $.001 per share, for $65 million. Subject to customary
conditions and there not having occurred a material adverse change, we expect to
sell these shares to the Apollo Investors shortly after the date of this
prospectus. We refer to our 9.2% Series A Junior Cumulative Convertible
Preferred Stock and our 9.2% Series B Junior Cumulative Convertible Preferred
Stock together as the 'Junior Preferred Stock.'
We currently do not have sufficient financing commitments to completely
fund our pre-operational capital requirements. We expect to satisfy the
remainder of our funding requirements through the issuance of debt or equity
securities or a combination of debt and equity securities. We cannot assure you
that we will obtain additional financing on favorable terms or that we will do
so on a timely basis.
We estimate that we will need the following amounts for the following
purposes:
<TABLE>
<S> <C>
to develop and commence operation of CD Radio by the end of $1,170 million
the fourth quarter of 2000
to fund operations through the first full year of operations $ 150 million
ending with the fourth quarter of 2001
Total through the first year of operations $1,320 million
</TABLE>
We have or expect that we may have use of the following funds to develop
and operate CD Radio:
<TABLE>
<S> <C>
net funds raised through June 30, 1999 (including those $ 832 million
borrowed under a term loan facility which must be
refinanced or repaid in an aggregate principal amount of
$115 million by the earlier of February 29, 2000 and ten
days prior to the launch of our second satellite)
funds from the sale of 9.2% Series B Junior Cumulative $ 63 million
Convertible Preferred Stock to the Apollo Investors, net
of fees and expenses (which are expected to be received in
October 1999)
funds which Bank of America may, but is not required to, $ 106 million
arrange for us ($225 million less $115 million to repay
our existing bank credit facility, net of estimated fees and
expenses)
Total funds we may, or expect to be able to, access $1,001 million
</TABLE>
After we give effect to the funds we have and the funds we expect to raise,
we estimate that we will need an additional $169 million to develop and commence
operation of CD Radio by the end of the fourth quarter of 2000 and an additional
$150 million to fund our business through the first full year of operations. If
Bank of America is unable to arrange a new credit facility, we will need to
raise $115 million to refinance the credit facility in the first quarter of 2000
and an additional $106 million to fund our operations through the end of the
fourth quarter of 2000. The availability of this new credit facility, which we
expect to draw on to repay amounts outstanding at maturity under our existing
bank credit facility, will be influenced by a variety of factors, some of which,
including the market for syndicated bank loans generally, are outside of our
control. We will require more money than estimated if there are delays, cost
overruns, launch failures or other adverse developments.
WE FACE MANY FINANCING CHALLENGES AND CONSTRAINTS
We face many challenges and constraints in financing our development and
operations, including those listed below.
5
<PAGE>
Our debt instruments limit our ability to incur indebtedness. The
indentures governing our 15% senior secured discount notes due 2007 and our
14 1/2% senior secured notes due 2009 limit our ability to incur additional
indebtedness. In addition, we expect any future senior indebtedness will contain
similar limits on our ability to incur additional indebtedness.
We will have to satisfy a variety of conditions before we can obtain any
syndicated bank borrowings. We entered into a credit agreement with Bank of
America and other lenders in July 1998 under which Bank of America and the other
lenders agreed to provide us a term loan facility of up to $115 million maturing
on the earlier of February 29, 2000 and ten days prior to the launch of our
second satellite. Bank of America has also agreed to attempt to arrange a
syndicate of lenders to provide us with a term loan facility of $225 million. To
borrow the funds under this term loan facility, we must first satisfy specified
conditions and negotiate, execute and deliver definitive loan documents. The
availability of this new credit facility, which we expect to draw on to repay
amounts outstanding at maturity under our existing bank credit facility, will be
influenced by a variety of factors, some of which, including the market for
syndicated bank loans generally, are outside of our control. We intend to use a
portion of the proceeds from this term loan facility to repay the existing term
loan facility and for other general corporate purposes. The term loan facility
would provide us with approximately $106 million of net additional funds after
repayment of the existing term loan facility and the payment of fees and
expenses.
We have substantial near-term requirements for additional funds. We require
substantial funds to construct and launch the satellites that will be part of
our broadcast system. We are committed to make aggregate payments of
approximately $736 million under our Amended and Restated Contract with Loral
(the 'Loral Satellite Contract'), which includes $15 million of long-lead time
elements for a fifth satellite and $3 million for integration analysis of the
viability of using the Sea Launch platform as an alternative launch vehicle for
our satellites. We started paying for the construction of the satellites in
April 1997 and we must pay further installments through December 2003. Loral has
agreed to defer a total of $50 million of the payments under the Loral Satellite
Contract originally scheduled for payment in 1999. Interest on the deferred
amounts accrues at 10% per annum until December 2001, at which time interest
becomes payable quarterly in cash. We must pay the amounts deferred in
installments beginning in June 2002.
If we fail to secure the financing required to pay Loral on a timely basis,
we risk:
delays in launching our satellites and starting broadcasting operations;
increases in the cost of building or launching our satellites or other
activities necessary to put CD Radio into operation;
a default on our commitments to Loral, our creditors or others;
our inability to commence CD Radio service; and
the forced discontinuance of our operations or the sale of our business.
A delay in introducing our service could hinder our ability to raise
additional financing. Any delay in implementing our business plan would hurt our
ability to obtain the financing we need by adversely affecting our expected
results of operations and increasing our cost of capital. Our ability to begin
offering our CD Radio service at the end of the fourth quarter of 2000 depends
on Loral delivering completed satellites before the launch dates and providing
or obtaining launch services on a timely basis. A significant delay in the
development, construction, launch or commencement of operation of our satellites
would adversely affect our results of operations in a material way.
Other delays in implementing our business plan could also materially
adversely affect our results of operations. Several factors could delay us,
including the following:
obtaining additional authorizations from the FCC;
coordinating the use of S-band radio frequency spectrum with Mexico;
delays in or modifications to the design, development, technical
specifications, construction or testing of our satellites, receivers or
other aspects of our system;
delay in commercial availability of devices capable of receiving
CD Radio;
6
<PAGE>
failure of our vendors to perform as anticipated; and
a delayed or unsuccessful satellite launch or deployment.
We have previously incurred some delays in implementing our business plan.
During any period of delay, we would continue to need significant amounts of
cash to fund capital expenditures, administrative and overhead costs,
contractual obligations and debt service. Accordingly, any delay could
materially increase the aggregate amount of funds we need to commence
operations. Additional financing may not be available on favorable terms or at
all during periods of delay.
WE ARE DEPENDENT UPON LORAL TO BUILD AND LAUNCH OUR SATELLITES
Our business depends upon Loral successfully constructing and launching the
satellites to transmit CD Radio. We are relying upon Loral to construct and to
deliver these satellites in orbit on a timely basis. We cannot assure you that
Loral will deliver the satellites or provide these launch services on a timely
basis, if at all. If Loral fails to deliver functioning satellites in a timely
manner, our business could be materially adversely affected. Although our
agreement with Loral requires Loral to pay us penalties for late delivery, based
on the length of the delay, these remedies may not adequately mitigate the
damage any launch delays cause to our business. In addition, if Loral fails to
deliver the designated launch services due to causes beyond its control, Loral
will not be liable for the delay or the damages caused by the delay. While the
satellites are under construction, Loral is at risk should anything happen to
the satellites. In addition, Loral is responsible for making sure the satellites
meet specific performance specifications at the time of launch (in the case of
our first three satellites) or at the time of delivery to our ground storage
location (in the case of our fourth satellite). However, if any satellite is
destroyed during or after launch or if the fourth satellite is damaged or
destroyed while in storage, Loral will not be responsible to us for the cost of
replacing it.
We depend on Loral to obtain access to available slots on launch vehicles
and to contract with third-party launch service providers for the launch of our
satellites. A launch service provider may postpone one or more of our launches
for a variety of reasons, including:
technical problems;
a launch of a scientific satellite whose mission may be degraded by delay;
the need to conduct a replacement launch for another customer; or
a launch of another customer's satellite whose launch was postponed.
Generally, Loral is not liable to us for a satellite or launch failure. However,
if the first Proton launch vehicle used to launch our satellites fails, Loral
will provide us with a free replacement launch. The timing of this replacement
launch cannot be predicted, but in any event would not be before delivery of the
fourth satellite.
We also depend on Loral to ensure that the software to test the satellites
before launch, to run the satellites and to track and control the satellites,
will be capable of handling the potential problems that may arise beginning on
January 1, 2000. These potential problems are known as 'The Year 2000 Issue.'
The Year 2000 Issue is the result of computer programs being written using two
digits (rather than four) to define a year, which could result in
miscalculations or system failures resulting from recognition of a date
occurring after December 31, 1999 as falling in the year 1900 (or another year
in the 1900s) rather than the year 2000 or thereafter. While currently the above
mentioned systems are not fully prepared to handle The Year 2000 Issue, Loral is
aware of this condition and has assured us that all Loral systems will be year
2000 compliant before the critical date of January 1, 2000.
WE ARE DEPENDENT ON LUCENT TO DESIGN AND DEVELOP CHIP SETS
Our business depends upon Lucent successfully designing, developing and
manufacturing commercial quantities of integrated circuits (or chip sets), which
will be used in consumer electronic devices capable of receiving CD Radio's
broadcasts. If Lucent fails to deliver commercial quantities of the chip sets in
a timely manner, the costs of the chip set development work
7
<PAGE>
increases significantly or the price of the chip set is not low enough to
support the introduction of consumer devices capable of receiving CD Radio, our
business will be materially adversely affected. We have agreed to pay Lucent the
cost of the development work related to the chip sets, currently estimated to be
approximately $27 million.
We cannot assure you that:
Lucent will be able to deliver significant quantities of chip sets in
order for us to commence operations at the end of the fourth quarter of
2000;
the cost to us of the chip set development work will not exceed $27
million; or
Lucent will be able to establish a price for the chip sets which will be
low enough to encourage and support the widespread introduction of
consumer devices capable of receiving CD Radio.
WE ARE NOT SURE THERE WILL BE A MARKET FOR CD RADIO
Currently no one offers a commercial satellite radio service such as
CD Radio in the United States. As a result, our proposed market is new and
untested and we cannot reliably estimate the potential demand for this service
or the degree to which our proposed service will meet that demand. We cannot
assure you that there will be sufficient demand for CD Radio to enable us to
achieve significant revenues or cash flow or profitable operations. CD Radio
will achieve or fail to gain market acceptance depending upon factors beyond our
control, including:
the willingness of consumers to pay subscription fees to obtain satellite
radio broadcasts;
the cost, availability and consumer acceptance of devices capable of
receiving CD Radio;
our marketing and pricing strategies and those of our competitor;
the development of alternative technologies or services; and
general economic conditions.
OUR PLANNED SYSTEM RELIES ON UNPROVEN APPLICATIONS OF TECHNOLOGY
Our satellite system applies technology in new and unproven ways. CD Radio
is designed to be broadcast from three satellites orbiting the Earth. Two of the
three satellites will transmit the same signal at any given time to receivers
that will receive signals through antennas. This design applies technology in
new and unproven ways. Accordingly, we cannot assure you that the CD Radio
system will work as planned.
Some obstructions will adversely affect CD Radio reception. High
concentrations of tall buildings, other obstructions, such as those found in
large urban areas, and tunnels will block the signals from both transmitting
satellites. We plan to install terrestrial repeating transmitters to rebroadcast
CD Radio in some urban areas to mitigate this problem. However, some areas with
impediments to satellite line-of-sight may still experience 'dead zones.' We
cannot assure you that the CD Radio system will operate as planned with the
technology we have developed.
Our system has never been tested with orbiting satellites. We cannot assure
you that the CD Radio system will function as intended until we test it with
orbiting satellites and antennas and receivers suitable for commercial
production. We have never done this kind of test because there are no commercial
satellites in orbit capable of transmitting radio signals on S-band frequencies
to the United States. In support of our application for our FCC license, we
conducted a terrestrial simulation of our proposed radio service from November
1993 through November 1994. For the demonstration, we transmitted S-band signals
to a prototype receiver and satellite dish antenna installed in a car to
simulate specific transmission characteristics of our planned system. As part of
the demonstration, the prototype receiver received 30 channels of compact disc
quality music while the car was driven throughout the range. We have also
successfully tested our system in San Francisco, where our terrestrial repeater
network has been completed.
8
<PAGE>
SATELLITE LAUNCHES HAVE SIGNIFICANT RISKS
We cannot assure you that the launches of our satellites will be
successful. Satellite launches have significant risks, including launch failure,
damage or destruction of the satellite during launch and failure to achieve a
proper orbit or operate as planned. The Loral Satellite Contract does not
protect us against the risks inherent in satellite launches or in-orbit
operations. Our three satellites are scheduled to be launched on Proton launch
vehicles, which are built by Russian entities. The Proton family of launch
vehicles has a launch success rate of 92% based on its last 50 launches. Past
experience, however, is not necessarily indicative of future performance.
On July 5, 1999, the second stage of a Proton rocket launched from the
Baikonur Cosmodrome in Kazakhstan malfunctioned during flight. As a result of
this failure, Proton rocket launches were suspended and the Russian government
appointed an official investigatory commission. In late July 1999, the
commission announced that the failure was caused by a fire which started in one
of the launch vehicle's engines. Proton launches were resumed in
September 1999. We cannot assure you that these developments will not delay one
or more of our anticipated satellite launches.
As part of our risk management program, we contracted with Loral for the
construction of a fourth satellite that we will use as a ground spare and for
some of the long-lead time parts for a fifth satellite. We also plan to obtain
insurance covering a replacement launch to the extent required to cover risks
Loral does not assume.
SATELLITES HAVE A LIMITED LIFE AND MAY FAIL IN ORBIT
We expect that our satellites will last approximately 15 years, and that
after this period their performance in delivering CD Radio will deteriorate. We
cannot assure you, however, of the useful life of any particular satellite. Our
operating results would be adversely affected if the useful life of our initial
satellites is significantly shorter than 15 years.
The useful lives of our satellites will vary and will depend on a number of
factors, including:
quality of construction;
amount of fuel on board;
durability of component parts;
expected gradual environmental degradation of solar panels;
random failure of satellite components, which could result in damage to or
loss of a satellite; and
in rare cases, damage or destruction by electrostatic storms or collisions
with other objects in space.
If one of our satellites fails on launch or in orbit and if we are required to
launch our spare satellite, our operational timetable will be delayed for up to
six months. If two or more of our satellites fail on launch or in orbit, our
operational timetable could be delayed by at least 16 months.
INSURANCE MAY NOT COVER ALL RISKS OF LAUNCHING AND OPERATING SATELLITES
There are many potential risks to insure. Our agreement with Loral does not
protect us against launch vehicle failure, failure of a satellite to deploy
correctly or failure of a satellite to operate as planned. Accordingly, we must
purchase insurance to protect adequately against these risks. We cannot assure
you that we will be able to purchase launch insurance or in-orbit insurance. In
addition, the insurance premiums we pay may increase substantially upon any
adverse change in insurance market conditions.
Many risks we face may not be covered by insurance. Our insurance may not
cover all of our losses, and may not fully reimburse us for the following:
expenditures for a satellite which fails to perform to specifications
after launch;
9
<PAGE>
damages from business interruption, loss of business and any expenditures
arising from satellite failures or launch delays; and
losses for which there are deductibles, exclusions and conditions.
OUR TECHNOLOGY MAY BECOME OBSOLETE
We will depend on technologies being developed by third parties to
implement key aspects of our system. These technologies may become obsolete. We
may be unable to obtain more advanced technologies on a timely basis or on
reasonable terms, or our competitors may obtain more advanced technologies and
we may not have access to these technologies.
RECEIVERS AND ANTENNAS ARE NOT YET AVAILABLE
To receive the CD Radio service, a subscriber will need to purchase a
device capable of receiving our broadcasts as well as an appropriate antenna.
Although we have entered into an agreement with Lucent to develop and
manufacture chip sets that represent the essential element of CD Radio
receivers, we cannot assure you that Lucent will succeed in this development
effort. We have also entered into agreements with Delco, Recoton, Alpine and
Matsushita to design and develop devices capable of receiving CD Radio
broadcasts and antennas for use with these devices. We cannot assure you that
Delco, Recoton, Alpine or Matsushita will succeed in their development efforts.
No one currently manufactures devices capable of receiving CD Radio
broadcasts and suitable antennas, and none of Delco, Recoton, Alpine and
Matsushita has agreed to manufacture commercial quantities of these devices. We
do not intend to manufacture or distribute CD Radio receivers and antennas
ourselves. We have discussed the manufacture of CD Radio receivers and antennas
for retail sale in the United States with several manufacturers, including
Delco, Visteon, Recoton, Alpine and Matsushita. These discussions may not result
in a binding commitment on the part of any manufacturer to produce, market and
sell devices capable of receiving CD Radio broadcasts and suitable antennas in a
timely manner and at a price that would permit the widespread introduction of
CD Radio in accordance with our business plan. In addition, any manufacturers of
devices capable of receiving CD Radio broadcasts and antennas may not produce
them in sufficient quantities to meet anticipated consumer demand. Our business
would be materially adversely affected if we cannot arrange for the timely
development of these products for commercial sale at an affordable price and
with sufficient retail distribution.
Our FCC license requires that we design a receiver that is interoperable
with the national satellite radio system being developed by the other existing
licensee, XM Satellite Radio Inc. Although we have made progress towards
designing a receiver that is interoperable with the system XM is constructing,
we cannot predict whether we will be able to satisfy this interoperability
requirement because of the various technological challenges involved. Complying
with this interoperability requirement also could make the devices capable of
receiving CD Radio broadcasts and the related antenna more difficult and costly
to manufacture. Accordingly, this interoperability requirement could delay the
commercial introduction of these products or require that they be sold at higher
prices.
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY AGAINST CONVENTIONAL RADIO STATIONS,
THE OTHER HOLDER OF AN FCC LICENSE TO PROVIDE THIS SERVICE OR OTHER POTENTIAL
PROVIDERS OF THIS SERVICE
We will be competing with established conventional (over the air) radio
stations, which, unlike CD Radio:
do not charge subscription fees;
do not require users to purchase a separate receiver and antenna;
often offer local information programming such as local news and traffic
reports; and
in the case of some FM stations, may begin to broadcast digital, compact
disc quality signals before we start operations.
In addition to direct competition from XM, we face the possibility of
additional satellite broadcast radio competition:
10
<PAGE>
if the FCC grants additional licenses for satellite-delivered radio
services;
if holders of licenses for other portions of the electromagnetic spectrum
(currently licensed for other uses) obtain changes to their licenses; or
if holders of licenses without FCC restrictions for other portions of the
spectrum devise a method of broadcasting satellite radio.
Finally, one or more competitors may design a satellite radio broadcast
system that is superior to our system. The competitive factors listed above
could materially adversely affect our results of operations. In addition, any
delays in introducing our service also could place us at a competitive
disadvantage relative to any competitor that begins operations before us.
WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE RAPID GROWTH
We expect to experience significant and rapid growth in the scope and
complexity of our business as we proceed with the development of our satellite
radio system. As of the date of this prospectus, we do not currently employ
sufficient staff to program our broadcast service, manage operations, control
the operation of our satellites or handle sales and marketing efforts. Although
we have hired experienced executives in these areas, we must hire many
additional employees before we begin commercial operations of our service. This
growth is likely to place a substantial strain on our management and operational
resources. Our results of operations could be materially adversely affected if
we fail to do any of the following:
develop and implement effective management systems;
hire and train sufficient personnel to perform all of the functions
necessary to effectively provide our service;
manage our subscriber base and business; or
manage our growth effectively.
WE ARE SUBJECT TO CONTINUING AND DETAILED REGULATION BY THE FCC
Our FCC license is being challenged. On October 10, 1997, the FCC's
International Bureau granted us an FCC license after we submitted a winning bid
in an FCC auction. One of the low-bidders in the FCC auction applied to have the
full FCC review the grant of our FCC license. The application requests that the
FCC adopt restrictions on foreign ownership and overrule the granting of our FCC
license on the basis of our ownership. If the FCC denies this application, the
complaining party may appeal to the U.S. Court of Appeals. Because less than 25%
of our voting stock is owned by non-U.S. persons, we believe the FCC will uphold
the grant of our FCC license. We cannot predict the ultimate outcome of any
proceedings relating to this application or any other proceedings that
interested parties may file. Since December 29, 1997, there have been no
developments in this matter.
We need a modification to our FCC license before we can begin operation. In
May 1998, we decided to increase the number of satellites in our system from two
to three and to change the orbit of those satellites. To implement these
changes, the FCC must approve changes to our FCC license. If the FCC were to
deny our application to modify our license, we would be required to redesign our
proposed system and modify our satellites, at a significant cost, and our
commercial operations would be delayed. On December 11, 1998, we filed an
application with the FCC for these changes. Although we believe that the FCC
will approve our application for this necessary change, we cannot assure you
that this will occur. XM and WCS Radio, Inc. have filed comments objecting to
this modification of our FCC license. The FCC staff has requested additional
materials from us, and we are in the process of complying with the staff's
request. We cannot predict the time it will take the FCC to act on our
application or any of these objections, or whether additional submissions or
waiver requests will be necessary, and we cannot be sure that the modification
we have requested will be granted.
We will need to renew our FCC license after eight years. The term of our
FCC license with respect to each satellite is eight years, beginning on the date
it is declared operational after it is inserted into orbit. When the term of our
FCC license for each satellite expires, we must apply for
11
<PAGE>
a renewal of the relevant license. If the FCC does not renew our FCC license, we
would be forced to cease broadcasting CD Radio. We cannot assure you that we
will obtain these renewals.
We need FCC approval to operate our terrestrial repeating transmitters.
Although we plan to install terrestrial repeating transmitters to rebroadcast
CD Radio in some urban areas, the FCC has not yet established rules governing
the application procedure for obtaining authorizations to construct and operate
terrestrial repeating transmitters on a commercial basis. The FCC initiated a
rulemaking on the subject in March 1997 and received several comments urging the
FCC to consider placing restrictions on the ability to deploy terrestrial
repeating transmitters. We cannot predict the outcome of this process.
The United States needs to complete frequency coordination with Mexico. To
use our assigned spectrum, the United States government must complete a process
of frequency coordination with Mexico. We cannot assure you that the United
States government will be able to coordinate use of this spectrum with Mexico or
do so in a timely manner. The United States and Canadian governments were
required to complete a similar process and have done so.
New devices may interfere with CD Radio broadcasts. The FCC has proposed
regulations to allow a new type of lighting device that may generate radio
energy in the part of the spectrum we intend to use. We believe the current
proposed regulations for these devices do not contain adequate safeguards to
prevent interference with services such as CD Radio. If the FCC fails to adopt
adequate technical standards specifically applicable to these devices and if the
use of these devices becomes commonplace, we could experience difficulties
enforcing our rights. If the FCC fails to adopt adequate standards, the new
devices could materially adversely affect reception of our broadcasts. Although
we believe that the FCC will set adequate standards to prevent harmful
interference, we cannot assure you that it will do so.
We may be adversely affected by changing regulations. To provide CD Radio,
we must retain our FCC license and obtain or retain other requisite approvals.
Our ability to do so could be affected by changes in laws, FCC regulations,
international agreements governing communications policy generally or
international agreements relating specifically to CD Radio. In addition, the
manner in which CD Radio would be offered or regulated could be affected by
these changes.
We may be adversely affected by foreign ownership restrictions. The
Communications Act of 1934 restricts ownership in some broadcasters by
foreigners. If these foreign ownership restrictions were applied to us, we would
need further authorization from the FCC if our foreign ownership were to exceed
25%. The order granting our FCC license determined that, as a private carrier,
those restrictions do not apply to us. However, the order granting our FCC
license stated that our foreign ownership status under the Communications Act
could be raised in a future proceeding. The pending appeal of the grant of our
FCC license may bring the question of foreign ownership restrictions before the
full FCC.
We could be required to comply with public service regulations. The FCC has
indicated that it may impose public service obligations on satellite radio
broadcasters in the future, which could add to our costs or reduce our revenues.
For example, the FCC could require broadcasters to set aside channels for
educational programming. We cannot predict whether the FCC will impose public
service obligations or the impact that any of these obligations would have on
our results of operations.
CONSUMERS MAY STEAL OUR SERVICE
Consumers may steal the CD Radio signal. Although we plan to use encryption
technology to mitigate signal piracy, we do not believe that this technology is
infallible. Accordingly, we cannot assure you that we can eliminate theft of the
CD Radio signal. Widespread signal theft could reduce the number of motorists
willing to pay us subscription fees and materially adversely affect our results
of operations.
OUR PATENTS MAY NOT BE SUFFICIENT TO PREVENT OTHERS FROM COPYING ELEMENTS OF OUR
SYSTEM
Although our U.S. patents cover various features of satellite radio
technology, our patents may not cover all aspects of our system. Others may
duplicate aspects of our system which are not
12
<PAGE>
covered by our patents without liability to us. In addition, competitors may
challenge, invalidate or circumvent our patents. We may be forced to enforce our
patents or determine the scope and validity of other parties' proprietary rights
through litigation. In this event, we may incur substantial costs and we cannot
assure you of success in this litigation. In addition, others may block us from
operating our system if our system infringes their patents, their pending patent
applications which mature into patents or their inventions developed earlier
which mature into patents. Should we desire to license our technology, we cannot
assure you that we can do so. Assuming we pay all necessary fees on time, the
earliest expiration date on any of our patents is April 10, 2012.
WE MAY NOT BE ABLE TO SATISFY A CHANGE OF CONTROL OFFER
The indentures governing our senior secured notes and our senior secured
discount notes and the certificates of designations for our Series C Preferred
Stock, 9.2% Series A Junior Cumulative Convertible Preferred Stock and 9.2%
Series B Junior Cumulative Convertible Preferred Stock contain provisions that
apply to a change of control of our company. Additionally, future securities
sold under this registration statement may contain similar provisions. If
someone triggers a change of control as defined in those instruments, or in
future instruments sold under this registration statement, we must offer to
purchase those securities. If we have to make such an offer, we cannot be sure
that we will have enough funds to pay for all the securities that holders could
tender. If we fail to pay for our senior secured notes and our senior secured
discount notes in a change of control offer, we will be in default under the
indentures for the affected notes and the holders of these notes and their
trustees may demand that we prepay all amounts outstanding under these notes. If
we fail to pay for the Series C Preferred Stock in a change of control offer,
the holders of a majority of this class of stock will be able to elect directors
constituting at least 25% of our board of directors, up to a maximum of two
directors. If we fail to pay for the 9.2% Series A Junior Cumulative Convertible
Preferred Stock and the 9.2% Series B Junior Cumulative Convertible Preferred
Stock in a change of control offer because of our obligations to other holders
of our debt securities or preferred stock, we must use our best efforts to
satisfy these obligations or to obtain permission to repurchase these classes of
preferred stock. Any securities sold under this registration statement in the
future may have similar provisions.
EXISTING STOCKHOLDERS MAY CONTROL US AND THEIR INTERESTS MAY CONFLICT WITH YOURS
As of August 31, 1999, our executive officers and directors beneficially
owned or could vote approximately 25.4% of our outstanding common stock. In
addition, as of that date, our executive officers and directors together with
Prime 66 and the Apollo Investors beneficially owned or could vote approximately
47% of our outstanding common stock (assuming conversion of the Junior Preferred
Stock). As a result of this concentration of ownership, these stockholders, if
they choose to act in concert, may exert considerable influence over our
management and policies. Similarly, some or all of these stockholders could
delay, defer or prevent a change of control.
WE DO NOT INTEND TO PAY ANY DIVIDENDS ON OUR COMMON STOCK
We have never paid any dividends on our common stock, and we do not
currently anticipate paying any dividends on this stock. In addition, many of
our agreements limit our ability to pay dividends.
OUR STOCK PRICE HAS BEEN VOLATILE
The trading price of our common stock has been volatile, and it may
continue to be so. This trading price could fluctuate widely in response to
announcements of business and technical developments by us or our competitors,
our success in accomplishing our business plan and other events or factors,
including expectations by investors and securities analysts and our prospects.
In addition, stock markets have experienced extreme price volatility in recent
years. This volatility has had a substantial effect on the market prices of
development stage companies, at times for reasons unrelated to their operating
performance. These broad market fluctuations may adversely affect the price of
our common stock.
13
<PAGE>
OUR RIGHTS PLAN AND ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS COULD
PREVENT AN ACQUISITION OF OUR COMPANY
Our stockholders rights plan, the anti-takeover provisions in our charter
documents and any issuance of our preferred stock could be deemed to have
anti-takeover effects and may delay, deter or prevent an acquisition of our
company that a stockholder might consider to be in his or her best interest. Our
board of directors has the authority to issue shares of preferred stock in one
or more series and to determine the price, rights, preferences and privileges of
those shares without any further vote or action by stockholders. We have adopted
a stockholders rights plan and in connection with the stockholders rights plan,
our board of directors designated 300,000 shares of preferred stock as Series B
Preferred Stock. Any issuance of our preferred stock, including preferred stock
with voting and conversion rights, as well as our Series C Preferred Stock, our
9.2% Series A Junior Cumulative Convertible Preferred Stock and our 9.2%
Series B Junior Cumulative Convertible Preferred Stock, which are convertible
into shares of common stock, may adversely affect the voting power of the
holders of common stock.
We also may become subject to the anti-takeover provisions of Section 203
of the Delaware General Corporation Law. These provisions could delay or prevent
a change of our control or adversely affect the market price of our common
stock. Furthermore, the severance provisions of employment agreements with some
members of our management provide for payments that could discourage an
attempted change in our control.
THERE IS NO PUBLIC MARKET FOR THE DEBT SECURITIES, PREFERRED STOCK OR WARRANTS
Before the offering of any debt securities, preferred stock or warrants,
there will have been no public market for those securities and we do not intend
to apply for the listing of any debt securities or preferred stock that may be
offered by this prospectus on any securities exchange or for quotation of any
debt securities or preferred stock on any public market. We cannot assure you
that an active public market for any debt securities, preferred stock or
warrants will develop or as to the liquidity, if any, that may develop in such
market. If an active public market in any new class of securities does not
develop, the market price and liquidity of those securities may be adversely
affected. Please refer to the section in this prospectus entitled 'Plan of
Distribution.'
Historically, the market for non-investment grade debt securities and
preferred stock has been affected by disruptions that have caused substantial
volatility in the prices of securities similar to the debt securities, preferred
stock and warrants that may be offered by this prospectus. We cannot assure you
that any market for those securities will not be affected by similar
disruptions.
HOLDERS OF DEBT SECURITIES WITH ORIGINAL ISSUE DISCOUNT MAY BE LIMITED IN
BANKRUPTCY CLAIMS
Debt securities that are issued or treated as issued at a discount from
their principal amount will generally be treated as having original issue
discount. If a bankruptcy case is commenced by or against us under the United
States Bankruptcy Code after the issuance of the debt securities, the claim of a
holder of the debt securities may be limited to an amount equal to the sum of
(1) the initial public offering price for the debt securities and (2) that
portion of the original issue discount that is not deemed to constitute
'unmatured interest' for purposes of the United States Bankruptcy Code. Any
original issue discount that was not amortized as of the date of the
commencement of a bankruptcy filing would constitute 'unmatured interest.'
DILUTION UPON CONVERSION OF PREFERRED STOCK AND CONVERTIBLE DEBT
Our common equity holders and warrant holders may be diluted by the
following actions:
if the holders of our Series C Preferred Stock convert their shares into
common stock, which may be done at any time;
if we issue convertible debt securities (which we may do at any time
unless prior approval of our stockholders is required under Delaware law,
the rules of the Nasdaq National Market or the rules of any other stock
exchange on which our securities may be listed or the issuance is limited
by the instruments governing our debt securities) and the holders thereof
convert their shares into common stock;
14
<PAGE>
if the Apollo Investors convert their Junior Preferred Stock into common
stock, which may be done at any time;
if we issue additional equity securities, which we may do at any time
unless prior approval of our stockholders is required under Delaware law,
the rules of the Nasdaq National Market or the rules of any other stock
exchange on which our equity securities may be listed; or
if Ford exercises its warrants to purchase up to four million shares of
our common stock, which Ford may do only if it satisfies requirements
relating to the manufacture of vehicles capable of receiving CD Radio.
15
<PAGE>
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
The following table sets forth our ratio of earnings to combined fixed
charges and preferred stock dividends for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------- SIX MONTHS ENDED
1994 1995 1996 1997 1998 JUNE 30, 1999
---- ---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed
charges(1)................... -- -- -- -- -- --
Ratio of earnings to combined
fixed charges and preferred
stock dividends(1)........... -- -- -- -- -- --
</TABLE>
- ------------
(1) No figure is provided for any period during which the applicable ratio was
less than 1.00.
The ratio of earnings to fixed charges is computed by dividing our
earnings, which include income before taxes (excluding the cumulative and
transition effects of accounting changes) and fixed charges, by fixed charges.
The ratio of earnings to combined fixed charges and preferred stock dividends is
computed by dividing earnings by the sum of fixed charges and dividends on
preferred stock. 'Fixed charges' consist of interest on debt and a portion of
rentals determined to be representative of interest. For the years ended
December 31, 1994, 1995, 1996, 1997 and 1998 and for the six months ended
June 30, 1999, our earnings were insufficient to cover our fixed charges by
approximately $4.1 million, $2.1 million, $2.8 million, $4.8 million, $62.3
million and $46.4 million. Earnings were also inadequate to cover our combined
fixed charges and preferred stock dividends over the same time periods by
approximately $4.1 million, $2.1 million, $2.8 million, $59.1 million, $99.9
million and $66.0 million.
USE OF PROCEEDS
Unless otherwise indicated in the applicable prospectus supplement, we will
use the net proceeds from the sale of the offered securities for general
corporate purposes, including capital expenditures, the reduction of
indebtedness and other purposes. We may invest funds not required immediately
for such purposes in short-term obligations or we may use them to reduce the
future level of our indebtedness.
DESCRIPTION OF DEBT SECURITIES
The following description of the terms of the debt securities sets forth
certain general terms that may apply to the debt securities. The particular
terms of any debt securities will be described in the prospectus supplement
relating to those debt securities. For purposes of this 'Description of Debt
Securities,' the term 'CD Radio' refers to our company but not to any of its
subsidiaries.
Any senior debt securities will be issued in one or more series under an
indenture, as supplemented or amended from time to time, between us and an
institution that we will name in the related prospectus supplement, as trustee.
Any subordinate debt securities will be issued in one or more series under an
indenture, as supplemented or amended from time to time, between us and an
institution that we will name in the related prospectus supplement, as trustee.
For ease of reference, we will refer to the indenture relating to any senior
debt securities as the senior indenture and to the indenture relating to any
subordinate debt securities as the subordinate indenture.
This summary of the terms and provisions of the debt securities and the
indentures is not necessarily complete, and we refer you to the copy of the
forms of the indentures which are filed as exhibits to the registration
statement of which this prospectus forms a part. Whenever we refer to particular
defined terms of the indentures in this section or in a prospectus supplement,
we are incorporating these definitions into this prospectus or the prospectus
supplement.
16
<PAGE>
GENERAL
The debt securities will be issuable in one or more series in accordance
with an indenture supplemental to the applicable indenture or a resolution of
our board of directors or a committee of the board. Unless otherwise specified
in a prospectus supplement, each series of senior debt securities will rank
equally in right of payment with all of our other senior obligations. Each
series of subordinate debt securities will be subordinated and junior in right
of payment to the extent and in the manner described in the subordinate
indenture and any supplemental indenture relating to the subordinate debt
securities. Except as otherwise provided in a prospectus supplement, the
indentures do not limit our ability to incur other secured or unsecured debt,
whether under the indentures, any other indenture that we may enter into in the
future or otherwise. For more information, you should read the prospectus
supplement relating to a particular offering of securities.
The applicable prospectus supplement will describe the following terms of
the series of debt securities with respect to which this prospectus is being
delivered:
the title of the debt securities of the series and whether such series
constitutes senior debt securities or subordinated debt securities;
any limit on the aggregate principal amount of the debt securities;
the person to whom any interest on a debt security shall be payable, if
other than the person in whose name that debt security is registered on
the regular record date;
the date or dates on which the principal and premium, if any, of the debt
securities of the series are payable or the method of that determination
or the right to defer any interest payments;
the rate or rates (which may be fixed or variable) at which the debt
securities will bear interest, if any, or the method of determining the
rate or rates, the date or dates from which such interest will accrue, the
interest payment dates on which any such interest will be payable or the
method by which the dates will be determined, the regular record date for
any interest payable on any interest payment date and the basis upon which
interest will be calculated if other than that of a 360-day year of twelve
30-day months;
the place or places where the principal of and any premium and any
interest on the debt securities of the series will be payable, if other
than the Borough of Manhattan, The City of New York;
the period or periods within which, the date or dates on which, the price
or prices at which and the terms and conditions upon which the debt
securities of the series may be redeemed, in whole or in part, at our
option or otherwise;
our obligation, if any, to redeem, purchase or repay the debt securities
of the series pursuant to any sinking fund or analogous provisions or at
the option of the holders and the period or periods within which, the
price or prices at which, the currency or currencies including currency
unit or units in which and the terms and conditions upon which, the debt
securities shall be redeemed, purchased or repaid, in whole or in part;
the terms, if any, upon which the debt securities of the series may be
convertible into or exchanged for other debt securities, preferred stock
or common stock of CD Radio and the terms and conditions upon which the
conversion or exchange shall be effected, including the initial conversion
or exchange price or rate, the conversion or exchange period and any other
additional provisions;
the denominations in which any debt securities will be issuable, if other
than denominations of $1,000 and any integral multiple thereof;
the currency, currencies or currency units in which payment of principal
of and any premium and interest on debt securities of the series shall be
payable, if other than United States dollars;
17
<PAGE>
any index, formula or other method used to determine the amount of
payments of principal of and any premium and interest on the debt
securities;
if the principal amount payable at the stated maturity of debt securities
of the series will not be determinable as of any one or more dates before
the stated maturity, the amount that will be deemed to be the principal
amount as of any date for any purpose, including the principal amount
thereof which will be due and payable upon any maturity other than the
stated maturity or which will be deemed to be outstanding as of any date
(or, in any such case, the manner in which the deemed principal amount is
to be determined), and if necessary, the manner of determining the
equivalent thereof in United States currency;
if the principal of or any premium or interest on any debt securities is
to be payable, at our election or the election of the holders, in one or
more currencies or currency units other than that or those in which such
debt securities are stated to be payable, the currency, currencies or
currency units in which payment of the principal of and any premium and
interest on such debt securities shall be payable, and the periods within
which and the terms and conditions upon which such election is to be made;
if other than the principal amount thereof, the portion of the principal
amount of the debt securities which will be payable upon declaration of
the acceleration of the maturity thereof or provable in bankruptcy;
the applicability of, and any addition to or change in, the covenants and
definitions then set forth in the applicable indenture or in the terms
then set forth in such indenture relating to permitted consolidations,
mergers or sales of assets;
any changes or additions to the provisions of the applicable indenture
dealing with defeasance, including the addition of additional covenants
that may be subject to our covenant defeasance option;
whether any of the debt securities are to be issuable in permanent global
form and, if so, the depositary or depositaries for such global security
and the terms and conditions, if any, upon which interests in such debt
securities in global form may be exchanged, in whole or in part, for the
individual debt securities represented thereby in definitive registered
form, and the form of any legend or legends to be borne by the global
security in addition to or in lieu of the legend referred to in the
applicable indenture;
the appointment of any trustee, any authenticating or paying agents,
transfer agent or registrars;
the terms, if any, of any guarantee of the payment of principal, premium
and interest with respect to debt securities of the series and any
corresponding changes to the provisions of the applicable indenture as
then in effect;
the terms, if any, of the transfer, mortgage, pledge or assignment as
security for the debt securities of the series of any properties, assets,
moneys, proceeds, securities or other collateral, including whether
certain provisions of the Trust Indenture Act are applicable and any
corresponding changes to provisions of the applicable indenture as then in
effect;
any addition to or change in the events of default with respect to the
debt securities of the series and any change in the right of the trustee
or the holders to declare the principal, premium and interest with respect
to the debt securities due and payable;
any applicable subordination provisions in addition to those set forth
herein with respect to subordinated debt securities;
if the securities of the series are to be secured, the property covered by
the security interest, the priority of the security interest, the method
of perfecting the security interest and any escrow arrangements related to
the security interest; and
any other terms of the debt securities not inconsistent with the
provisions of the applicable indenture.
18
<PAGE>
We may sell debt securities at a substantial discount below their stated
principal amount or debt securities that bear no interest or bear interest at a
rate which at the time of issuance is below market rates. We will describe the
material U.S. federal income tax consequences, accounting and other special
considerations applicable to the debt securities in the applicable prospectus
supplement.
If the purchase price of any of the debt securities is payable in one or
more foreign currencies or currency units or if any debt securities are
denominated in one or more foreign currencies or currency units or if the
principal of, premium, if any, or interest, if any, on any debt securities is
payable in one or more foreign currencies or currency units, we will set forth
the restrictions, elections, specific terms and other information with respect
to such issue of debt securities and such foreign currency or currency units in
the applicable prospectus supplement.
EXCHANGE, REGISTRATION, TRANSFER AND PAYMENT
Unless otherwise indicated in the applicable prospectus supplement,
principal, premium, if any, and interest, if any, on the debt securities will be
payable, without coupons, and the exchange of and the transfer of debt
securities will be registrable, at our office or agency maintained for such
purpose in the Borough of Manhattan, The City of New York and at any other
office or agency maintained for such purpose. Unless otherwise indicated in the
applicable prospectus supplement, the debt securities will be issued in
denominations of $1,000 and any integral multiples thereof.
Holders may present each series of debt securities for exchange as provided
above, and for registration of transfer, with the form of transfer endorsed
thereon, or with a satisfactory written instrument of transfer, duly executed,
at the office of the appropriate securities registrar or at the office of any
transfer agent designated by us for such purpose and referred to in the
applicable prospectus supplement, without service charge and upon payment of any
taxes and other governmental charges as described in the indenture. We will
appoint the trustee of each series of debt securities as securities registrar
for such series under the indenture. If the applicable prospectus supplement
refers to any transfer agents, in addition to the securities registrar initially
designated by us with respect to any series, we may at any time rescind the
designation of any such transfer agent or approve a change in the location
through which any such transfer agent acts, provided that we maintain a transfer
agent in each place of payment for the series. We may at any time designate
additional transfer agents with respect to any series of debt securities.
All moneys paid by us to a paying agent for the payment of principal,
premium, if any, or interest, if any, on any debt security which remain
unclaimed for two years after such principal, premium or interest has become due
and payable may be repaid to us, and after such time, the holder of such debt
security may look only to us for payment.
In the event of any redemption, we shall not be required to (a) issue,
register the transfer of or exchange debt securities of any series during a
period beginning at the opening of business 15 days before the day of the
mailing of a notice of redemption of debt securities of that series to be
redeemed and ending at the close of business on the day of such mailing or (b)
register the transfer of or exchange any debt security called for redemption,
except, in the case of any debt securities being redeemed in part, any portion
not being redeemed.
BOOK-ENTRY SYSTEM
The provisions set forth below in this section headed 'Book-Entry System'
will apply to the debt securities of any series if the prospectus supplement
relating to such series so indicates.
Unless otherwise indicated in the applicable prospectus supplement, the
debt securities of such series will be represented by one or more global
securities registered with a depositary named in the prospectus supplement
relating to such series. Except as set forth below, a global security may be
transferred, in whole but not in part, only to the depositary or another nominee
of the depositary.
19
<PAGE>
The specific terms of the depositary arrangement with respect to a series
of debt securities will be described in the prospectus supplement relating to
the series. We anticipate that the following provisions will generally apply to
depositary arrangements.
Upon the issuance of a global security, the depositary will credit, on its
book-entry registration and transfer system, the respective principal amounts of
the debt securities represented by such global security to the accounts of
institutions or persons, commonly known as participants, that have accounts with
the depositary or its nominee. The accounts to be credited will be designated by
the underwriters, dealers or agents. Ownership of beneficial interests in a
global security will be limited to participants or persons that may hold
interests through participants. Ownership of interests in such global security
will be shown on, and the transfer of those ownership interests will be effected
only through, records maintained by the depositary (with respect to
participants' interests) and such participants (with respect to the owners of
beneficial interests in such global security). The laws of some jurisdictions
may require that certain purchasers of securities take physical delivery of the
securities in definitive form. These limits and laws may impair the ability to
transfer beneficial interests in a global security.
So long as the depositary, or its nominee, is the registered holder and
owner of such global security, the depositary or such nominee, as the case may
be, will be considered the sole owner and holder for all purposes of the debt
securities and for all purposes under the applicable indenture. Except as set
forth below or as otherwise provided in the applicable prospectus supplement,
owners of beneficial interests in a global security will not be entitled to have
the debt securities represented by such global security registered in their
names, will not receive or be entitled to receive physical delivery of debt
securities in definitive form and will not be considered to be the owners or
holders of any debt securities under the applicable indenture or such global
security. Accordingly, each person owning a beneficial interest in a global
security must rely on the procedures of the depositary and, if such person is
not a participant, on the procedures of the participant through which such
person owns its interest, to exercise any rights of a holder of debt securities
under the applicable indenture of such global security. We understand that under
existing industry practice, in the event we request any action of holders of
debt securities or if an owner of a beneficial interest in a global security
desires to take any action that the depositary, as the holder of such global
security is entitled to take, the depositary would authorize the participants to
take such action, and that the participants would authorize beneficial owners
owning through such participants to take such actions or would otherwise act
upon the instructions of beneficial owners owning through them.
Payments of principal of and premium, if any, and interest, if any, on debt
securities represented by a global security will be made to the depositary or
its nominee, as the case may be, as the registered owner and holder of such
global security, against surrender of the debt securities at the principal
corporate trust office of the trustee. Interest payments will be made at the
principal corporate trust office of the trustee or by a check mailed to the
holder at its registered address. Payment in any other manner will be specified
in the prospectus supplement.
We expect that the depositary, upon receipt of any payment of principal,
premium, if any, of interest, if any, in respect of a global security, will
credit immediately participants' accounts with payments in amounts proportionate
to their respective beneficial interests in the principal amount of such global
security as shown on the records of the depositary. We expect that payments by
participants to owners of beneficial interests in a global security held through
such participants will be governed by standing instructions and customary
practices, as is now the case with securities held for the accounts of customers
in bearer form or registered in 'street name,' and will be the responsibility of
such participant. Neither CD Radio nor the trustee nor any agent of CD Radio or
the trustee will have any responsibility or liability for any aspect of the
records relating to, or payments made on account of, beneficial ownership
interests in a global security or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests or for any other aspect
of the relationship between the depositary and its participants or the
relationship between such participants and the owners of beneficial interests in
such global security owning through such participants.
20
<PAGE>
Unless and until it is exchanged in whole or in part for debt securities in
definitive form, a global security may not be transferred except as a whole by
the depositary to a nominee of such depositary or by a nominee of such
depositary to such depositary or another nominee of such depositary.
Unless otherwise provided in the applicable prospectus supplement, debt
securities represented by a global security will be exchangeable for debt
securities in definitive form of like tenor as such global security in
denominations of $1,000 and in any greater amount that is an integral multiple
thereof if:
the depositary notifies us and the trustee that it is unwilling or unable
to continue as depositary for such global security or if at any time the
depositary ceases to be a clearing agency registered under the Exchange
Act and a successor depositary is not appointed by us within 90 days;
we, in our sole discretion, determine not to have all of the debt
securities represented by a global security and notify the trustee
thereof; or
there shall have occurred and be continuing an event of default or an
event which, with the giving of notice or lapse of time, or both, would
constitute an event of default with respect to the debt securities.
Any debt security that is exchangeable pursuant to the preceding sentence is
exchangeable for debt securities registered in such names as the depositary
shall instruct the trustee. It is expected that such instructions may be based
upon directions received by the depositary from its participants with respect to
ownership of beneficial interests in such global security. Subject to the
foregoing, a global security is not exchangeable except for a global security or
global securities of the same aggregate denominations to be registered in the
name of the depositary or its nominee.
OPTION TO DEFER INTEREST PAYMENTS OR TO PAY-IN-KIND
If so described in the applicable prospectus supplement, we will have the
right, at any time and from time to time during the term of any series of debt
securities, to defer the payment of interest for such number of consecutive
interest payment periods as may be specified in the applicable prospectus
supplement, subject to the terms, conditions and covenants, if any, specified in
such prospectus supplement, provided that an extension period may not extend
beyond the stated maturity of the final installment of principal of the series
of debt securities. If provided in the applicable prospectus supplement, we will
have the right, at any time and from time to time during the term of any series
of debt securities, to make payments of interest by delivering additional debt
securities of the same series.
COVENANTS OF CD RADIO
The covenants, if any, that will apply to a particular series of debt
securities will be set forth in the indenture relating to such series of debt
securities. Except as otherwise specified in the applicable prospectus
supplement with respect to any series of debt securities, we may remove or add
covenants without the consent of holders of the securities.
DEFEASANCE AND COVENANT DEFEASANCE
We may be discharged from our obligations on the debt securities of any
series that have matured or will mature or be redeemed within one year if we
deposit with the trustee enough cash to pay all the principal, interest and any
premium due to the stated maturity date or redemption date of the debt
securities and comply with certain other conditions set forth in the applicable
indenture.
Each indenture contains a provision that permits us to elect either:
to be discharged after 90 days from all of our obligations (subject to
limited exceptions) with respect to any series of debt securities then
outstanding ('defeasance'); and/or
21
<PAGE>
to be released from our obligations under certain covenants and from the
consequences of an event of default resulting from a breach of those
covenants or cross-default ('covenant defeasance').
To make either of the above elections, we must deposit in trust with the trustee
money and/or U.S. Government Obligations, if the debt securities are denominated
in U.S. dollars, and/or Foreign Government Securities if the debt securities are
denominated in a foreign currency, which through the payment of principal and
interest under their terms will provide sufficient money, without reinvestment,
to repay in full those senior or subordinate debt securities. As a condition to
defeasance or covenant defeasance, we must deliver to the trustee an opinion of
counsel that the holders of the debt securities will not recognize income, gain
or loss for federal income tax purposes as a result of the defeasance.
If either of the above events occur, the holders of the debt securities of
the series will not be entitled to the benefits of the indenture, except for
registration of transfer and exchange of debt securities and replacement of
lost, stolen or mutilated debt securities.
EVENTS OF DEFAULT
The following events are defined in the indentures as 'Events of Default'
with respect to a series of debt securities (unless such event is specifically
inapplicable to a particular series as described in the applicable prospectus
supplement):
failure to pay any interest on any debt security of that series when due,
which failure continues for 30 days;
failure to pay principal of or any premium on any debt security of that
series when due;
failure to deposit any sinking fund payment, within 30 days of when due,
in respect of any debt security of that series;
with respect to each series of debt securities, failure to perform any
other of our covenants applicable to that series, which failure continues
for 90 days after written notice to us by the trustee or to us and the
trustee by the holders of at least 25% in principal amount of the
outstanding debt securities of that series specifying such failure,
requiring it to be remedied and stating that such notice is a 'Notice of
Default';
certain events of bankruptcy, insolvency or reorganization involving us;
and
any other Event of Default provided with respect to debt securities of
that series.
If an Event of Default for any series of debt securities occurs and
continues, the trustee or holders of at least 25% in principal amount of the
debt securities of that series may declare the entire principal amount of all
the debt securities of that series to be due and payable immediately. Subject to
certain conditions, the declaration may be annulled and past defaults (except
uncured payment defaults and certain other specified defaults) may be waived by
the holders of a majority of the principal amount of the outstanding debt
securities of that series.
An Event of Default for a particular series of debt securities does not
necessarily constitute an event of default for any other series of debt
securities issued under an indenture.
Each indenture will require the trustee, within 90 days after the
occurrence of a default known to it with respect to any outstanding series of
debt securities, to give the holders of that series notice of the default if
uncured or not waived. However, the trustee may withhold this notice if it
determines in good faith that the withholding of this notice is in the interest
of those holders, except that the trustee may not withhold this notice in the
case of a payment default. The term 'default' for the purpose of this provision
means any event that is, or after notice or lapse of time or both would become,
an Event of Default with respect to debt securities of that series.
Other than the duty to act with the required standard of care during an
Event of Default, a trustee is not obligated to exercise any of its rights or
powers under the applicable indenture at the request or direction of any of the
holders of debt securities, unless the holders have offered to the trustee
reasonable indemnification. Each indenture provides that the holders of a
majority in
22
<PAGE>
principal amount of outstanding debt securities of any series may in certain
circumstances direct the time, method and place of conducting any proceeding for
any remedy available to the trustee, or exercising any trust or other power
conferred on the trustee.
The senior indenture will include a covenant that we will file annually
with the trustee a certificate of no default, or specifying any default that
exists.
MODIFICATION, WAIVER AND MEETINGS
We and the trustee may enter into supplemental indentures without the
consent of the holders of debt securities for one or more of the following
purposes:
to evidence the succession of another person to us pursuant to the
provisions of the applicable indenture relating to consolidations, mergers
and sales of assets and the assumption by the successor of our covenants,
agreements and obligations in the applicable indenture and in the debt
securities;
to surrender any right or power conferred upon us by the applicable
indenture, to add to our covenants such further covenants, restrictions,
conditions or provisions for the protection of the holders of all or any
series of debt securities as our board of directors shall consider to be
for the protection of the holders of the debt securities, and to make the
occurrence, or the occurrence and continuance, of a default in any of the
additional covenants, restrictions, conditions or provisions a default or
an Event of Default under the applicable indenture (provided, however,
that with respect to any such additional covenant, restriction, condition
or provision, the supplemental indenture may provide for a period of grace
after default, which may be shorter or longer than that allowed in the
case of other defaults, may provide for an immediate enforcement upon the
default, may limit the remedies available to the trustee upon the default,
or may limit the right of holders of a majority in aggregate principal
amount of any or all series of debt securities to waive the default);
to cure any ambiguity or omission or to correct or supplement any
provision contained in the applicable indenture, in any supplemental
indenture or in any debt securities that may be defective or inconsistent
with any other provision contained therein, to convey, transfer, assign,
mortgage or pledge any property to or with the trustee, or to make such
other provisions in regard to matters or questions arising under the
applicable indenture, in each case as shall not adversely affect the
interests of any holders of debt securities of any series in any material
respect;
to modify or amend the applicable indenture to permit the qualification of
such indenture or any supplemental indenture under the Trust Indenture Act
as then in effect;
to add guarantees with respect to any or all of the debt securities or to
secure any or all of the debt securities;
to add to, change or eliminate any of the provisions of the applicable
indenture with respect to one or more series of debt securities; so long
as any such addition, change or elimination not otherwise permitted under
the applicable indenture shall (1) neither apply to any debt security of
any series created before the execution of the supplemental indenture and
entitled to the benefit of the provision nor modify the rights of the
holders of any debt security with respect to the provision, or (2) become
effective only when there is no such debt security outstanding;
to evidence and provide for the acceptance of appointment by a successor
or separate trustee with respect to the debt securities of one or more
series and to add to or change any of the provisions of the applicable
indenture as shall be necessary to provide for or facilitate the
administration of such indenture by more than one trustee;
to establish the form or terms of debt securities of any series;
to provide for uncertificated debt securities in addition to or in place
of certificated debt securities (provided that the uncertificated debt
securities are issued in registered form for
23
<PAGE>
purposes of Section 163(f) of the Internal Revenue Code or in a manner
such that the uncertificated debt securities are described in Section
163(f)(2)(B) of such Code); and
to make any change that does not adversely affect the rights of any
holder.
Modifications and amendments of the applicable indenture may be made by
CD Radio and the trustee with the consent of the holders of a majority in
principal amount of the outstanding debt securities of each series affected by
such modification or amendment; provided, however, that no such modification or
amendment may, without the consent of the holder of each outstanding debt
security affected thereby:
change the stated maturity of the principal of, or any installment of
principal of or interest on, any debt security;
reduce the principal amount of, rate of interest on or any premium payable
upon the redemption of any debt security;
reduce the amount of principal of an original issue discount security
payable upon acceleration of the maturity thereof;
change the place of payment where, or the coin or currency in which, any
debt security or any premium or interest thereon is payable;
impair the right to institute suit for the enforcement of any payment on
or with respect to any debt security after the stated maturity, redemption
date or repayment date;
reduce the percentage in principal amount of outstanding debt securities
of any series, the consent of whose holders is required for modification
or amendment of the applicable indenture or for waiver of compliance with
certain provisions of such indenture or for waiver of certain defaults;
change the optional redemption or repurchase provisions in a manner
adverse to any holder; or
modify any of the provisions set forth in this paragraph, except to
increase the percentage of holders whose consent is required for
modifications and amendments of the applicable indenture or to provide
that certain other provisions of the applicable indenture may not be
modified or waived without the consent of the holder of each outstanding
debt security affected thereby.
The holders of a majority in principal amount of the outstanding debt
securities of each series may, on behalf of the holders of all the debt
securities of that series, waive, insofar as that series is concerned,
compliance by us with certain restrictive provisions of the applicable
indenture. The holders of a majority in principal amount of the outstanding debt
securities of each series may, on behalf of all holders of debt securities of
that series and any coupons relating to such series, waive any past default
under the applicable indenture with respect to debt securities of the series,
except a default (a) in the payment of principal of or any premium or interest
on any debt security of such series or (b) in respect of a covenant or provision
of the applicable indenture which cannot be modified or amended without the
consent of each holder of outstanding debt securities of the affected series.
The indentures provide that in determining whether the holders of the
requisite principal amount of the outstanding debt securities have given any
request, demand, authorization, direction, notice, consent or waiver thereunder
or whether a quorum is present at a meeting of holders of debt securities
the principal amount of an original issue discount security that shall be
deemed to be outstanding shall be the amount of the principal thereof that
would be due and payable as of the date of such determination upon
acceleration of the maturity thereof;
the principal amount of a debt security denominated in other than U.S.
dollars shall be the U.S. dollar equivalent, determined on the date of
original issuance of such debt security, of the principal amount of such
debt security (or, in the case of an original issue discount
24
<PAGE>
security, the U.S. dollar equivalent on the date of original issuance of
such debt security of the amount determined (as provided in (a) above of
such debt security)); and
debt securities owned by us or any subsidiary of ours shall be disregarded
and deemed not to be outstanding.
In addition, we and the trustees may execute, without the consent of any
holder of the debt securities, any supplemental indenture for the purpose of
creating any new series of debt securities.
SUBORDINATION
Except as set forth in the applicable prospectus supplement, the
subordinate indenture provides that the subordinate debt securities are
subordinate and junior in right of payment to all of our senior indebtedness.
If an Event of Default occurs with respect to any senior indebtedness
permitting the holders thereof to accelerate the maturity thereof and the
default is the subject of judicial proceedings or written notice of such Event
of Default, requesting that payments on subordinate debt securities cease, is
given to us by the holders of senior indebtedness, then unless and until
(1) the default in payment or Event of Default shall have been cured or waived
or (2) 120 days shall have passed after written notice is given and the default
is not the subject of judicial proceedings, no direct or indirect payment, in
cash, property or securities, by set-off or otherwise, will be made or agreed to
be made on account of the subordinate debt securities or interest thereon or in
respect of any repayment, redemption, retirement, purchase or other acquisition
of subordinate debt securities.
Except as set forth in the applicable prospectus supplement, the
subordinate indenture provides that in the event of:
any insolvency, bankruptcy, receivership, reorganization or other similar
proceeding relating to us, our creditors or our property; or
any proceeding for the liquidation or dissolution of CD Radio,
all present and future senior indebtedness, including, without limitation,
interest accruing after the commencement of the proceeding, will first be paid
in full before any payment or distribution, whether in cash, securities or other
property, will be made by us on account of subordinate debt securities. In that
event, any payment or distribution, whether in cash, securities or other
property, other than securities of CD Radio or any other corporation provided
for by a plan of reorganization or a readjustment, the payment of which is
subordinate, at least to the extent provided in the subordination provisions of
the indenture, to the payment of all senior indebtedness at the time outstanding
and to any securities issued in respect thereof under any such plan of
reorganization or readjustment and other than payments made from any trust
described in the 'Defeasance and Covenant Defeasance' above, which would
otherwise but for the subordination provisions be payable or deliverable in
respect of subordinate debt securities, including any such payment or
distribution which may be payable or deliverable by reason of the payment of any
other indebtedness of ours being subordinate to the payment of subordinated debt
securities, will be paid or delivered directly to the holders of senior
indebtedness or to their representative or trustee, in accordance with the
priorities then existing among such holders, until all senior indebtedness shall
have been paid in full. No present or future holder of any senior indebtedness
will be prejudiced in the right to enforce subordination of the indebtedness
evidenced by subordinate debt securities by any act or failure to act on our
part.
The term 'Senior Indebtedness' means:
(1) the principal, premium, if any, interest and all other amounts
owed in respect of all our (A) indebtedness for money borrowed and (B)
indebtedness evidenced by securities, debentures, bonds or other similar
instruments,
(2) all our capital lease obligations,
25
<PAGE>
(3) all our obligations issued or assumed as the deferred purchase
price of property, all our conditional sale obligations and all our
obligations under any title retention agreement (but excluding trade
accounts payable arising in the ordinary course of business),
(4) all our obligations for the reimbursement of any letter of credit,
banker's acceptance, security purchase facility or similar credit
transaction,
(5) all obligations of the type referred to in clauses (1) through (4)
above of other persons for the payment of which we are responsible or
liable as obligor, guarantor or otherwise, and
(6) all obligations of the type referred to in clauses (1) through (5)
above of other persons secured by any lien on any property or asset of ours
(whether or not such obligation is assumed by us), except for (x) any such
indebtedness that is by its terms subordinated to or pari passu with the
subordinate debt securities and (y) any indebtedness between or among us or
our affiliates, including all other debt securities and guarantees in
respect of those debt securities issued to any trust, or trustee of such
trust, partnership or other entity affiliated with us that is, directly or
indirectly, a financing vehicle of ours (a 'Financing Entity') in
connection with the issuance by such Financing Entity of preferred
securities or other securities that rank pari passu with, or junior to, the
subordinate debt securities.
Except as provided in the applicable prospectus supplement, the subordinate
indenture for a series of subordinated debt does not limit the aggregate amount
of senior indebtedness that may be issued by us. The subordinate debt securities
are effectively subordinated to all existing and future liabilities of our
subsidiaries.
By reason of such subordination, in the event of a distribution of assets
upon insolvency, some of our general creditors may recover more, ratably, than
holders of the subordinated debt securities.
A subordinate indenture may provide that the subordination provisions
thereof will not apply to money and securities held in trust pursuant to the
satisfaction and discharge and the legal defeasance provisions of the
subordinate indenture.
If this prospectus is being delivered in connection with the offering of a
series of subordinated debt securities, the accompanying prospectus supplement
or the information incorporated by reference therein will set forth the
approximate amount of senior indebtedness outstanding as of a recent date.
CONSOLIDATION, MERGER AND SALE OF ASSETS
Except as may otherwise be provided in the prospectus supplement, each
indenture provides that we may not consolidate with or merge with or into any
person, or convey, transfer or lease all or substantially all of its assets, or
permit any person to consolidate with or merge into us, unless the following
conditions have been satisfied:
(a) either (1) we shall be the continuing person in the case of a merger or
(2) the resulting, surviving or transferee person, if other than us
(the 'Successor Company'), shall be a corporation organized and
existing under the laws of the United States, any State or the District
of Columbia and shall expressly assume all our obligations under the
debt securities and the applicable indenture;
(b) immediately after giving effect to the transaction (and treating any
indebtedness that becomes an obligation of the Successor Company or any
subsidiary of ours as a result of the transaction as having been
incurred by the Successor Company or the subsidiary at the time of the
transaction), no default, Event of Default or event that, after notice
or lapse of time, would become an Event of Default under the applicable
indenture shall have occurred and be continuing; and
(c) we shall have delivered to the trustee under each indenture an
officers' certificate and an opinion of counsel, each stating that the
consolidation, merger, transfer or lease complies with the provisions
of the applicable indenture.
26
<PAGE>
Upon completion of any such transaction, the Successor Company resulting
from such consolidation or into which we are merged or the transferee or lessee
to which such conveyance, transfer or lease is made, will succeed to, and be
substituted for, and may exercise every right and power of, us under each
indenture, and thereafter, except in the case of a lease, the predecessor (if
still in existence) will be released from its obligations and covenants under
each indenture and all outstanding debt securities.
NOTICES
Except as otherwise provided in the indentures, notices to holders of debt
securities will be given by mail to the addresses of such holders as they appear
in the Security Register.
CONVERSION OR EXCHANGE
If and to the extent indicated in the applicable prospectus supplement, the
debt securities of any series may be convertible or exchangeable into other
securities. The specific terms on which debt securities of any series may be so
converted or exchanged will be set forth in the applicable prospectus
supplement. These terms may include provisions for conversion or exchange,
either mandatory, at the option of the holder, or at our option, in which case
the number of shares of other securities to be received by the holders of debt
securities would be calculated as of a time and in the manner stated in the
applicable prospectus supplement.
TITLE
Before due presentment of a debt security for registration of transfer, we,
the trustee and any agent of ours or the trustee may treat the person in whose
name such debt security is registered as the owner of such debt security for the
purpose of receiving payment of principal of and any premium and any interest
(other than defaulted interest or as otherwise provided in the applicable
prospectus supplement) on such debt security and for all other purposes
whatsoever, whether or not such debt security be overdue, and neither CD Radio,
the trustee nor any agent of ours or the trustee shall be affected by notice to
the contrary.
REPLACEMENT OF DEBT SECURITIES
Any mutilated debt security will be replaced by us at the expense of the
holder upon surrender of such debt security to the trustee. Debt securities that
become destroyed, stolen or lost will be replaced by us at the expense of the
holder upon delivery to the trustee of the debt security or evidence of the
destruction, loss or theft thereof satisfactory to us and the trustee. In the
case of a destroyed, lost or stolen debt security, an indemnity satisfactory to
the trustee and us may be required at the expense of the holder of such debt
security before a replacement debt security will be issued.
GOVERNING LAW
The indentures and the debt securities will be governed by, and construed
in accordance with, the laws of the State of New York.
REGARDING THE TRUSTEE
We may appoint a separate trustee for any series of debt securities. As
used herein in the description of a series of debt securities, the term
'trustee' refers to the trustee appointed with respect to the series of debt
securities.
The indentures contain certain limitations on the right of the trustee,
should it become a creditor of ours, to obtain payment of claims in certain
cases or to realize for its own account on certain property received in respect
of any such claim as security or otherwise. The trustee will be permitted to
engage in certain other transactions; however, if it acquires any conflicting
interest and there is a default under the debt securities of any series for
which the trustee serves as trustee, the trustee must eliminate such conflict or
resign.
The trustee or its affiliate may provide certain banking and financial
services to us in the ordinary course of business.
27
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our amended and restated certificate of incorporation provides for
authorized capital of 250,000,000 shares, consisting of 200,000,000 shares of
common stock, par value $0.001 per share, and 50,000,000 shares of preferred
stock, par value $0.001 per share.
The following description sets forth the terms and provisions of our common
stock, preferred stock and of certain classes of preferred stock which have been
authorized by the board of directors. The terms of any shares of our capital
stock offered by any prospectus supplement, but not set forth below, will be
described in the prospectus supplement relating to such shares of capital stock.
COMMON STOCK
As of September 15, 1999, we had 23,353,736 shares of common stock
outstanding held of record by approximately 230 persons, and had reserved for
issuance 46,489,827 shares of common stock with respect to incentive stock
plans, outstanding common stock purchase warrants and conversion of the
Series C Preferred Stock and Junior Preferred Stock.
Holders of the common stock are entitled to cast one vote for each share
held of record on all matters acted upon at any stockholder's meeting and to
receive dividends if, as and when declared by the Board of Directors out of
funds legally available therefor. There are no cumulative voting rights. If
there is any liquidation, dissolution or winding-up of our company, each holder
of our common stock will be entitled to participate, taking into account the
rights of any outstanding Preferred Stock, ratably in all of our assets
remaining after payment of liabilities. Holders of our common stock have no
preemptive or conversion rights. All outstanding shares of common stock,
including shares of common stock issued upon the exercise of the common stock
warrants, will be fully paid and non-assessable.
Our common stock is quoted on the Nasdaq National Market under the symbol
'CDRD.'
PREFERRED STOCK
The board of directors is authorized, subject to any limitations prescribed
by law, without further stockholder approval, to issue from time to time up to
an aggregate of 50,000,000 shares of our preferred stock, in one or more series.
Each such series of preferred stock shall have such number of shares,
designations, preferences, powers, qualifications and special or relative rights
or privileges as shall be determined by the board of directors, which may
include, among others, dividend rights, voting rights, redemption and sinking
fund provisions, liquidation preferences, conversion rights and preemptive
rights. The rights of the holders of common stock will be subject to the rights
of holders of any preferred stock issued in the future. The issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from acquiring, a majority of our outstanding voting stock.
The specific terms of any preferred stock being offered will be described
in the prospectus supplement relating to that preferred stock. The following
summaries of the provisions of the preferred stock are subject to, and are
qualified in their entirety by reference to, the certificate of designation
relating to the particular class or series of preferred stock. Reference is made
to the prospectus supplement relating to the preferred stock offered with that
prospectus for specific terms, including:
the designation of the preferred stock;
the number of shares of the preferred stock offered, the liquidation
preference per share and the initial offering price of the preferred
stock;
the dividend rate(s), period(s) and/or payment date(s) or method(s) of
calculation these items applicable to the preferred stock;
the date from which dividends on the preferred stock shall accumulate, if
applicable;
28
<PAGE>
the procedures for any auction and remarketing of the preferred stock;
the provision of a sinking fund, if any, for the preferred stock;
the provision for redemption, if applicable, of the preferred stock;
any listing of the preferred stock on any securities exchange;
the terms and conditions, if applicable, upon which the preferred stock
will be convertible into or exchangeable for common stock, and whether at
our option or the option of the holder;
whether the preferred stock will rank senior or junior to or on a parity
with any other class or series of preferred stock;
the voting rights, if any, of the preferred stock;
any other specific terms, preference, rights, limitations or restrictions
of the preferred stock; and
a discussion of United States federal income tax considerations applicable
to the preferred stock.
PREFERRED STOCK PURCHASE RIGHTS
On October 22, 1997, the board of directors adopted a stockholders rights
plan and, in connection with the adoption of this plan, declared a dividend
distribution of one 'Right' for each outstanding share of common stock to
stockholders of record at the close of business on November 3, 1997 (the 'Rights
Record Date'). Except as described below, each Right entitles the registered
holder of the Right to purchase from us one-hundredth of a share of Series B
Preferred Stock, par value $0.001 per share (the 'Series B Shares'), at a
purchase price of $115.00 (the 'Purchase Price'), which may be adjusted. The
Purchase Price shall be paid in cash. The description and terms of the Rights
are set forth in a Rights Agreement, dated October 22, 1997 (the 'Rights
Agreement'), by and between us and Continental Stock Transfer & Trust Company,
as Rights Agent, and in amendments to the Rights Agreement dated October 13,
1998, November 13, 1998, December 22, 1998 and June 11, 1999.
On October 13, 1998, we amended the Rights Agreement to make it
inapplicable to the purchase of 5,000,000 shares of common stock by Prime 66 and
to allow Prime 66 to purchase and own up to an additional 1% of the outstanding
shares of common stock without Prime 66 becoming an 'Acquiring Person' within
the meaning of the Rights Agreement. On November 13, 1998 and December 22, 1998,
we amended the Rights Agreement to render it inapplicable to the purchase of the
Junior Preferred Stock by the Apollo Investors and to permit the Apollo
Investors to (1) acquire additional shares of Junior Preferred Stock issued as
dividends declared on the Junior Preferred Stock, (2) acquire additional shares
of common stock upon the conversion of shares of Junior Preferred Stock into
shares of common stock, or (3) acquire up to an additional 1% of the outstanding
shares of common stock, without the Apollo Investors becoming 'Acquiring
Persons' within the meaning of the Rights Agreement. On June 11, 1999, we also
amended the Rights Agreement to make it inapplicable to the issuance of warrants
entitling Ford Motor Company ('Ford') to acquire from us 4,000,000 shares of our
common stock. In addition, we expect to amend the Rights Agreement to make it
inapplicable to (1) the purchase by Ford of up to $20 million of our common
stock and (2) the purchase by Everest Capital funds of up to $30 million of our
convertible subordinated notes, in each case prior to an offering we expect to
complete shortly after the date of this prospectus.
Initially, no separate Right certificates will be distributed and the
Rights will be evidenced, with respect to any shares of common stock outstanding
on the Rights Record Date, by the certificates representing the shares of common
stock. Until the Rights Separation Date (as defined below), the Rights will be
transferred with, and only with, certificates for shares of common stock. Until
the earlier of the Rights Separation Date and the redemption or expiration of
the Rights, new certificates for shares of common stock issued after the Rights
Record Date will contain a notation incorporating the Rights Agreement by
reference. The Rights are not exercisable until the
29
<PAGE>
earlier to occur of (1) 10 business days following a public announcement that a
person or group of affiliated or associated persons (an 'Acquiring Person') has
acquired, or obtained the right to acquire, beneficial ownership of 15% or more
of the outstanding shares of common stock (except by reason of (a) exercise by
this person of stock options granted to this person by us under any of our stock
option or similar plans (b) the exercise of conversion rights contained in
specified classes of Preferred Stock, or (c) the exercise of warrants owned on
the date of the Rights Agreement, which include warrants to acquire 1,740,000
shares of common stock issued to an affiliate of Everest Capital Fund, Ltd. or
(2) 15 business days following the commencement of a tender offer or exchange
offer by any person (other than CD Radio, any subsidiary of CD Radio or any
employee benefit plan of CD Radio) if, upon the completion of this tender offer
or exchange offer, this person or group would be the beneficial owner of 15% or
more of the outstanding shares of common stock (the earlier of these dates being
called the 'Rights Separation Date'), and will expire on October 22, 2002,
unless earlier redeemed by us as described below. As soon as practicable
following the Rights Separation Date, separate certificates evidencing the
Rights will be mailed to holders of record of the shares of common stock as of
the close of business on the Rights Separation Date and, thereafter, the
separate Rights certificates alone will evidence the Rights. A holder of 15% or
more of the common stock as of the date of the Rights Agreement will be excluded
from the definition of 'Acquiring Person' unless the holder increases the
aggregate percentage of its and its affiliates' beneficial ownership interest in
us by an additional 1%.
If, at any time following the Rights Separation Date, (1) we are the
surviving corporation in a merger with an Acquiring Person and our shares of
common stock are not changed or exchanged, (2) a person (other than CD Radio,
any subsidiary of CD Radio or any employee benefit plan of CD Radio), together
with its Affiliates and Associates (as defined in the Rights Agreement), becomes
an Acquiring Person (in any manner, except by (a) the exercise of stock options
granted under our existing and future stock option plans, (b) the exercise of
conversion rights contained in specified Preferred Stock issues, (c) the
exercise of warrants specified in the Rights Agreement or (d) a tender offer for
any and all outstanding shares of common stock made as provided by applicable
laws, which remains open for at least 40 Business Days (as defined in the Rights
Agreement) and into which holders of 80% or more of our outstanding shares of
common stock tender their shares), (3) an Acquiring Person engages in one or
more 'self-dealing' transactions as described in the Rights Agreement or
(4) during the time when there is an Acquiring Person, an event occurs (e.g., a
reverse stock split), that results in the Acquiring Person's ownership interest
being increased by more than one percent, the Rights Agreement provides that
proper provision shall be made so that each holder of a Right will thereafter be
entitled to receive, upon the exercise of the Right at the then current exercise
price of the Right, shares of common stock (or, in some circumstances, cash,
property or other securities of ours) having a value equal to two times the
exercise price of the Right.
If, at any time following the first date of public announcement by us or an
Acquiring Person indicating that this Acquiring Person has become an Acquiring
Person (the 'Shares Acquisition Date'), (1) we consolidate or merge with another
person and we are not the surviving corporation, (2) we consolidate or merge
with another person and are the surviving corporation, but in the transaction
our shares of common stock are changed or exchanged or (3) 50% or more of our
assets or earning power is sold or transferred, the Rights Agreement provides
that proper provision shall be made so that each holder of a Right shall
thereafter have the right to receive, upon the exercise of the Right at the then
current exercise price of the Right, shares of common stock of the acquiring
company having a value equal to two times the exercise price of the Right.
The board of directors may, at its option, at any time after the right of
the board to redeem the Rights has expired or terminated (with some exceptions),
exchange all or part of the then outstanding and exercisable Rights (other than
those held by the Acquiring Person and Affiliates and Associates of the
Acquiring Person) for shares of common stock at a ratio of one share of common
stock per Right, as adjusted; provided, however, that the Right cannot be
exercised once a person, together with the person's Affiliates and Associates,
becomes the beneficial owner of 50%
30
<PAGE>
or more of the shares of common stock then outstanding. If the board authorizes
this exchange, the Rights will immediately cease to be exercisable.
Notwithstanding any of the foregoing, following the occurrence of any of
the events described in the fourth and fifth paragraphs of this section, any
Rights that are, or (under some circumstances specified in the Rights Agreement)
were, beneficially owned by any Acquiring Person or Affiliate or Associate of an
Acquiring Person shall immediately become null and void. The Rights Agreement
contains provisions intended to prevent the utilization of voting trusts or
similar arrangements (except for the voting arrangement between Darlene
Friedland, David Margolese and us) that could have the effect of rendering
ineffective or circumventing the beneficial ownership rules described in the
Rights Agreement.
The Purchase Price payable, and the number of Series B Shares or other
securities or property issuable, upon exercise of the Rights may be adjusted
from time to time to prevent dilution (1) in the event of a dividend of
Series B Shares on, or a subdivision, combination or reclassification of, the
Series B Shares, (2) upon the grant to holders of the Series B Shares of
specific rights or warrants to subscribe for Series B Shares or securities
convertible into Series B Shares at less than the current market price of the
Series B Shares or (3) upon the distribution to holders of the Series B Shares
of debt securities or assets (excluding regular quarterly cash dividends and
dividends payable in Series B Shares) or of subscription rights or warrants
(other than those referred to above).
At any time after the date of the Rights Agreement until ten Business Days
(a period that can be extended) following the Shares Acquisition Date, the board
of directors, with the concurrence of a majority of the independent directors
(those members of the Board who are not officers or employees of ours or of any
subsidiary of ours and who are not Acquiring Persons or their Affiliates,
Associates, nominees or representatives, and who either (1) were members of the
board before the adoption of the Rights Plan or (2) were subsequently elected to
the board and were recommended for election or approved by a majority of the
independent directors then on the board), may redeem the Rights, in whole but
not in part, at a price of $0.01 per Right, which may be adjusted. Thereafter,
the board may redeem the Rights only in specified circumstances including in
connection with specific events not involving an Acquiring Person or an
Affiliate or Associate of an Acquiring Person. In addition, our right of
redemption may be reinstated if (1) an Acquiring Person reduces its beneficial
ownership to 10% or less of the outstanding shares of common stock in a
transaction or series of transactions not involving us and (2) there is at the
time no other Acquiring Person. The Rights Agreement may also be amended, as
described below, to extend the period of redemption.
Until a Right is exercised, the holder of the Right, as such, will have no
rights as a stockholder, including the right to vote or to receive dividends.
While the distribution of the Rights will not be taxable to stockholders or to
us, stockholders may, depending upon the circumstances, recognize taxable income
if the Rights become exercisable for shares of our common stock (or other
consideration) or for shares of common stock of the Acquiring Person.
Other than those provisions relating to the principal economic terms of the
Rights or imposing limitations on the right to amend the Rights Agreement, any
of the provisions of the Rights Agreement may be amended by the board with the
concurrence of a majority of the independent directors or by special approval of
our stockholders before the Rights Separation Date. Thereafter, the period
during which the Rights may be redeemed may be extended (by action of the board,
with the concurrence of a majority of the independent directors or by special
approval of our stockholders), and other provisions of the Rights Agreement may
be amended by action of the Board with the concurrence of a majority of the
independent directors or by special approval of our stockholders; provided,
however, that (a) this amendment will not adversely affect the interests of
holders of Rights (excluding the interests of any Acquiring Person) and (b) no
amendment shall be made at a time when the Rights are no longer redeemable
(except for the possibility of the right of redemption being reinstated as
described above).
31
<PAGE>
DELAWARE ANTI-TAKEOVER LAW AND PROVISIONS IN OUR CHARTER
Section 203 of the Delaware General Corporation Law ('Section 203')
generally provides that a stockholder acquiring more than 15% of the outstanding
voting stock of a corporation subject to the statute (an 'Interested
Stockholder') but less than 85% of this stock may not engage in some types of
Business Combinations (as defined in Section 203) with the corporation for a
period of three years after the time the stockholder became an Interested
Stockholder. The prohibition of Section 203 does not apply under the following
circumstances:
(1) before the time of the acquisition, the corporation's board of
directors approved either the Business Combination or the transaction in
which the stockholder became an Interested Stockholder; or
(2) the Business Combination is approved by the corporation's board of
directors and authorized at a stockholders' meeting by a vote of at least
two-thirds of the corporation's outstanding voting stock not owned by the
Interested Stockholder.
Under Section 203, these restrictions will not apply to specific Business
Combinations proposed by an Interested Stockholder following the earlier of the
announcement or notification of specific extraordinary transactions involving
the corporation and a person who was not an Interested Stockholder during the
previous three years, who became an Interested Stockholder with the approval of
the corporation's board of directors or who became an Interested Stockholder at
a time when the restrictions contained in Section 203 did not apply for reasons
specified in Section 203. The above exception applies if the extraordinary
transaction is approved or not opposed by a majority of the directors who were
directors prior to the person becoming an Interested Stockholder during the
previous three years or were recommended for election or elected to succeed
those directors by a majority of those directors.
Section 203 defines the term 'Business Combination' to encompass a wide
variety of transactions with or caused by an Interested Stockholder. These
include transactions in which the Interested Stockholder receives or could
receive a benefit on other than a pro rata basis with other stockholders,
transactions with the corporation which increase the proportionate interest in
the corporation directly or indirectly owned by the Interested Stockholder or
transactions in which the Interested Stockholder receives other benefits.
The provisions of Section 203, coupled with our board of director's
authority to issue preferred stock without further stockholder action, could
delay or frustrate the removal of incumbent directors or a change in our
control. The provisions could also discourage, impede or prevent a merger,
tender offer or proxy contest, even if the event would be favorable to the
interests of stockholders. Our stockholders, by adopting an amendment to our
amended and restated certificate of incorporation, may elect not to be governed
by Section 203 effective 12 months after the adoption. Neither our certificate
of incorporation nor our by-laws exclude us from the restrictions imposed by
Section 203.
10 1/2% SERIES C CONVERTIBLE PREFERRED STOCK
The board of directors has authorized the issuance of up to 2,025,000
shares of the Series C Preferred Stock.
General. The following description of our Series C Preferred Stock does not
purport to be complete and is qualified in its entirety by the provisions of our
amended and restated certificate of incorporation, and the certificate of
designations relating to the Series C Preferred Stock, each of which is
available on request.
Rank. The Series C Preferred Stock, with respect to dividend rights and
rights upon liquidation, winding-up or dissolution, ranks (1) senior and before
the common stock and to any other stock issued by us designated as junior to the
Series C Preferred Stock and (2) equally with any class or series of our stock,
the terms of which do not designate the class or series as either junior or
senior to the Series C Preferred Stock.
32
<PAGE>
Dividends. The annual dividend rate per share of the Series C Preferred
Stock is an amount equal to 10.5% of the sum of (x) the liquidation preference
of the Series C Preferred Stock and (y) all accrued and unpaid dividends, if
any, whether or not declared, from the date of issuance of the shares of
Series C Preferred Stock to the applicable dividend payment date. Dividends on
the shares of Series C Preferred Stock are cumulative, accruing quarterly and,
when and as declared by our board of directors, are payable quarterly initially
on November 15, 2002 (the 'First Scheduled Dividend Payment Date') and on
February 15, May 15, August 15 and November 15 of each year (each, a 'Dividend
Payment Date') thereafter. In addition, accrued dividends on the shares of
Series C Preferred Stock will be paid on the redemption date of any share of
Series C Preferred Stock redeemed by us, on the purchase date of any share of
Series C Preferred Stock purchased by us in an Offer to Purchase (defined below)
or on the conversion date of any share of Series C Preferred Stock converted
into shares of common stock on or after the First Scheduled Dividend Payment
Date. No accrued dividends will be paid on any shares of Series C Preferred
Stock that are converted by the holders of the Series C Preferred Stock before
the First Scheduled Dividend Payment Date, unless these shares of Series C
Preferred Stock are converted on or before a redemption date by holders of the
Series C Preferred Stock electing to convert these shares after having received
a notice of redemption for these shares. Dividends may be paid in cash, shares
of common stock or any combination of cash and common stock, at our option.
Common stock issued to pay dividends will be valued at the average closing price
of the common stock as reported in The Wall Street Journal for the 20
consecutive trading days immediately preceding the date of the payment.
Dividends with respect to any share of Series C Preferred Stock accumulate from
November 15, 1997.
If and so long as any full cumulative dividends payable on the shares of
Series C Preferred Stock in respect of all prior dividend periods will not have
been paid or set apart for payment, we will not pay any dividends or make any
distributions of assets on or redeem, purchase or otherwise acquire for
consideration shares of our capital stock ranking junior to or on a par with the
Series C Preferred Stock in payment of dividends.
Dividends on the shares of Series C Preferred Stock are payable to the
holders of record of Series C Preferred Stock as they appear on our stock
register on a record date, not more than 40 days nor fewer than 10 days
preceding the payment date of the dividends, as will be fixed by the board of
directors. Dividends on account of arrears for any past dividend periods may be
declared and paid at any time, without reference to any Dividend Payment Date,
to the holders of record on a date, not exceeding 40 days nor less than 10 days
preceding the payment date of the dividends, as may be fixed by the board of
directors. Dividends paid in cash will be paid to each holder of record in
United States dollars by check mailed to the holder at its address appearing on
our books. Any shares of common stock issued, at our option, to pay any
dividends on shares of Series C Preferred Stock will thereupon be duly
authorized, validly issued, fully paid and non-assessable. No fractional shares
of common stock will be issued as dividends.
Redemption. Except as described below, the shares of Series C Preferred
Stock may not be redeemed by us at our option before November 15, 2002. From and
after November 15, 1999 and before November 15, 2002, we may redeem shares of
Series C Preferred Stock, in whole or in part, at any time at a redemption price
of 100% of the liquidation preference of the shares of Series C Preferred Stock
redeemed, plus accrued and unpaid dividends, if any, whether or not declared, to
the redemption date, if the average closing price of the common stock as
reported in The Wall Street Journal for the 20 consecutive trading days before
the notice of redemption of the Series C Preferred Stock equals or exceeds
$31.50 per share, as adjusted. From and after November 15, 2002, we may redeem
shares of Series C Preferred Stock, in whole or in part, at the following
redemption prices per share, expressed as percentages of the liquidation
preference of Series C Preferred Stock, if redeemed during the 12-month period
beginning November 15 in the year indicated below:
33
<PAGE>
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2002............................................. 105.25%
2003............................................. 102.63%
2004............................................. 101.81%
2005 and thereafter.............................. 100.00%
</TABLE>
plus, in each case, accrued and unpaid dividends, if any, to the redemption
date.
On November 15, 2012 (the 'Mandatory Redemption Date'), the Company is
required to redeem all outstanding shares of Series C Preferred Stock at a
redemption price of 100% of the liquidation preference of the shares of
Series C Preferred Stock, plus accrued and unpaid dividends, if any, whether or
not declared, to the Mandatory Redemption Date.
The amount paid to the holders of shares of Series C Preferred Stock upon
redemption which is allocable to the liquidation preference of the shares of
Series C Preferred Stock shall be paid in cash and the amount of any accrued and
unpaid dividends to be paid on the shares of Series C Preferred Stock redeemed
shall be paid in cash, shares of common stock or any combination of cash and
common stock at our option.
We are required to give notice of any proposed redemption of shares of
Series C Preferred Stock on a date that is not less than 15 days nor more than
40 days (as determined by us, the 'Redemption Record Date') before the date of
redemption, to the holders of record on the Redemption Record Date of the shares
to be redeemed at their addresses appearing on our books. Each notice will
specify the shares of Series C Preferred Stock called for redemption, the
redemption price and the time, place and date of redemption. Neither failure to
mail the notice, nor any defect in the notice or in the mailing of the notice,
to any particular holder shall affect the sufficiency of the notice or the
validity of the proceedings for redemption with respect to the other holders. On
or after the redemption date, each holder of shares of Series C Preferred Stock
being redeemed will present and surrender the holder's certificate or
certificates evidencing the shares to us at the place described in the
redemption notice, whereupon we will cancel the shares and will pay to the
holders the redemption price for the surrendered shares, plus accrued and unpaid
dividends, if any, to the redemption date. If fewer than all the shares of
Series C Preferred Stock represented by any holder's certificate are redeemed,
we will issue a new certificate representing the unredeemed shares of Series C
Preferred Stock.
If fewer than all of the outstanding shares of Series C Preferred Stock are
being redeemed, the shares to be redeemed will be selected proportionately or by
lot or in another manner as our board of directors may determine, provided that
only whole shares shall be selected for redemption.
Any shares of Series C Preferred Stock which have been called for
redemption may be converted into shares of common stock before being redeemed
provided that the holder of the Series C Preferred Stock gives written notice to
us, before the close of business on the business day immediately preceding the
date of redemption, of the holder's election to convert shares of Series C
Preferred Stock into shares of common stock, together with the certificate or
certificates evidencing the shares, duly endorsed or assigned to us, and any
necessary transfer tax payment as described below. See ' -- Conversion.'
Change in Control. Upon the occurrence of a Change in Control, we must make
an offer to purchase (an 'Offer to Purchase') all then outstanding shares of
Series C Preferred Stock at a purchase price (the 'Change in Control Purchase
Price') in cash equal to 101% of their liquidation preference, plus all accrued
and unpaid dividends (paid in cash), if any, whether or not declared, to the
date the shares are purchased (the 'Change in Control Purchase Date'). A 'Change
in Control' is defined as the occurrence of any of the following events:
any 'person' or 'group' (as these terms are used in Sections 13(d) and
14(d) of the Exchange Act), other than Loral, Arianespace or David
Margolese, is or becomes the 'beneficial owner' (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall
be deemed to have 'beneficial ownership' of all securities that the person
has the right to acquire, whether this right is exercisable immediately or
only after
34
<PAGE>
the passage of time), directly or indirectly, of more than 40% of our
total outstanding voting stock;
we consolidate with, or merge with or into another person or convey,
transfer, lease or otherwise dispose of all or substantially all of our
assets to any person, or any person consolidates with or merges with or
into us, in a transaction in which our outstanding voting stock is
converted into or exchanged for cash, securities or other property, other
than, at all times when our senior discount notes are outstanding, those
transactions that are not deemed a 'Change of Control' under the terms of
the indenture relating to our senior discount notes;
during any consecutive two-year period, individuals who at the beginning
of the period constituted our board of directors (together with any new
directors whose election to the board of directors, or whose nomination
for election by our stockholders, was approved by a vote of 66 2/3% of the
directors then still in office who were either directors at the beginning
of the period or whose election or nomination for election was previously
so approved) cease for any reason to constitute a majority of our board of
directors then in office; or
we are liquidated or dissolved or a special resolution is passed by our
stockholders approving the plan of liquidation or dissolution,
other than, at all times when our senior discount notes are outstanding, those
transactions that are not deemed a 'Change of Control' under the terms of the
indenture relating to our senior discount notes.
Within 30 days following any Change in Control, we must give written notice
of the Change in Control to each holder of shares of Series C Preferred Stock by
first-class mail, postage prepaid, at his address appearing in our stock
register, stating the purchase price and that the purchase date shall be a
business day no earlier than 30 days nor later than 60 days from the date the
notice is mailed, or a later date if necessary to comply with requirements under
the Exchange Act; that any shares of Series C Preferred Stock not tendered will
continue to accumulate dividends; that, unless we default in the payment of the
purchase price, any shares of Series C Preferred Stock accepted for payment
under the Offer to Purchase shall cease to accumulate dividends after the Change
in Control Purchase Date; and other specific procedures that a holder of shares
of Series C Preferred Stock must follow to accept an Offer to Purchase or to
withdraw acceptance of an Offer to Purchase.
If an Offer to Purchase is made, we cannot assure you that we will have
available funds sufficient to pay the Change in Control Purchase Price for any
or all of the shares of Series C Preferred Stock that might be delivered by
holders of Series C Preferred Stock seeking to accept the Offer to Purchase and,
accordingly, if there is a Change of Control, none of the holders of the shares
of Series C Preferred Stock may receive the Change in Control Purchase Price for
their Series C Preferred Stock.
The existence of a holder's right to require us to repurchase the holder's
Series C Preferred Stock upon a Change in Control may deter a third party from
acquiring us in a transaction which constitutes a Change in Control.
Furthermore, the possibility that a third party would be deterred from acquiring
us may have an adverse effect on the market price of our Series C Preferred
Stock.
We will comply with the applicable tender offer rules, including
Rule 14e-1 under the Exchange Act, and any other applicable securities laws or
regulations in connection with an Offer to Purchase.
Conversion. Each share of Series C Preferred Stock may be converted at any
time, at the option of the holder, unless previously redeemed, into a number of
shares of common stock calculated by dividing the liquidation preference of the
Series C Preferred Stock (without accrued and unpaid dividends) by a conversion
price equal to $18 (the 'Conversion Price'). The Conversion Price will not be
adjusted at any time for accrued and unpaid dividends on the shares of Series C
Preferred Stock, but will be adjusted for the occurrence of specified corporate
events
35
<PAGE>
affecting the common stock. Upon conversion, at any time after the First
Scheduled Dividend Payment Date, holders of the Series C Preferred Stock will be
entitled to receive all accrued and unpaid dividends upon the shares of
Series C Preferred Stock converted payable in cash or shares of common stock, or
a combination of cash and common stock, at our option. No accrued dividends will
be paid on any shares of Series C Preferred Stock that are converted by their
holders before the First Scheduled Dividend Payment Date, unless these shares of
Series C Preferred Stock are converted before a redemption date by their holders
electing to convert these shares after having received a notice of redemption
for these shares. Common stock issued to pay dividends will be valued at the
average closing price of the common stock as reported in The Wall Street Journal
for the 20 consecutive trading days immediately preceding the date of payment.
To convert shares of Series C Preferred Stock into common stock, the
registered holder of the shares of Series C Preferred Stock must give written
notice to us that it elects to convert these shares and surrender at the office
of the transfer agent, or at another office or offices, if any, as the board of
directors may designate, the certificate or certificates therefor, duly endorsed
or assigned to us or in blank, together with any payment for stamp or similar
taxes that may be required to be paid by the holder, as described below.
Shares of Series C Preferred Stock will be deemed to have been converted
immediately before the close of business on the day of the surrender of the
shares for conversion, and the person or persons entitled to receive the common
stock issuable upon the conversion will be treated for all purposes as the
record holder or holders of the common stock at that time. As promptly as
practicable on or after the conversion date, we will issue and deliver a
certificate or certificates for the number of full shares of common stock
issuable upon the conversion, together with any payment instead of issuing any
fractional shares of common stock, to the person or persons entitled to receive
the same. In case shares of Series C Preferred Stock are called for redemption,
the right to convert the shares will terminate at the close of business on the
business day immediately preceding the redemption date, unless default shall be
made in payment of the redemption price.
The Conversion Price for shares of Series C Preferred Stock will be
adjusted in some events, including (1) dividends and other distributions payable
in common stock on any class of our capital stock, (2) the issuance to all
holders of common stock of rights or warrants entitling them to subscribe for or
purchase common stock at less than fair market value, (3) subdivisions,
combinations and reclassifications of the common stock, (4) distributions to all
holders of common stock of evidences of our indebtedness or assets and (5) a
consolidation or merger to which we are a party or the sale or transfer of all
or substantially all of our assets.
We will pay any and all stamp or other similar taxes that may be payable in
respect of the issue or delivery of shares of common stock upon conversion of
shares of Series C Preferred Stock. We will not, however, be required to pay any
tax which may be payable in respect of any transfer involved in the issue and
delivery of shares of common stock in a name other than that in which the shares
of Series C Preferred Stock so converted or exchanged were registered, and this
issue or delivery will not be made unless and until the person requesting this
issue has paid to us the amount of this tax, if any, or has established to our
satisfaction that this tax has been paid. All shares of common stock issued upon
conversion of shares of Series C Preferred Stock shall be validly issued, fully
paid and nonassessable.
Voting Rights. Other than the consent rights described below with respect
to some corporate actions, and except as otherwise provided by applicable law,
holders of shares of Series C Preferred Stock have no voting rights. Consent of
the holders of a majority of the outstanding shares of Series C Preferred Stock
will be required before we may take some corporate actions, including (1) any
amendment, alteration or repeal of any of the provisions of our certificate of
incorporation or by-laws which affects adversely the voting powers, rights or
preferences of the holders of the shares of Series C Preferred Stock, (2) the
authorization or creation of, or the increase in authorized amount of, any
shares of any class or series of equity securities that ranks senior to or on a
parity with the Series C Preferred Stock with respect to dividend rights and
rights upon liquidation, winding-up or dissolution and (3) merging or
consolidating with or into
36
<PAGE>
any other entity, unless the resulting corporation will thereafter have no class
or series of shares and no other securities either authorized or outstanding
ranking before, or on a parity with, the Series C Preferred Stock in the payment
of dividends or the distribution of its assets on liquidation, dissolution or
winding-up. In addition, if (1) after the First Scheduled Dividend Payment Date,
dividends payable on the shares of Series C Preferred Stock shall be in arrears
in an aggregate amount equal to at least six quarterly dividend payments,
(2) we fail to redeem all of the outstanding shares of Series C Preferred Stock
on the Mandatory Redemption Date, or (3) we fail to make an Offer to Purchase
upon a Change in Control, the holders of a majority of the outstanding shares of
Series C Preferred Stock, voting as a class, will be entitled to elect (a) one
director if there are seven or less directors on the board of directors at the
time or (b) two directors if there are eight or more directors on the board of
directors at the time.
In exercising these voting rights or when otherwise granted voting rights
by operation of law, each share of Series C Preferred Stock will be entitled to
one vote per share.
No consent of the holders of the Series C Preferred Stock is required for
(1) the creation by us of any indebtedness of any kind or (2) the authorization
or issuance of any class of our capital stock ranking junior to the Series C
Preferred Stock in payment of dividends or upon our liquidation, dissolution or
winding-up.
Liquidation. If there is any voluntary or involuntary liquidation,
dissolution or winding-up of us, before any distribution of our assets to the
holders of shares of common stock or any other capital stock of ours ranking
junior to the Series C Preferred Stock upon our liquidation, dissolution or
winding-up, the holders of shares of Series C Preferred Stock will be entitled
to receive out of our assets available for distribution to our stockholders,
whether from capital, surplus or earnings, an amount per share of Series C
Preferred Stock equal to $100, plus accrued and unpaid dividends on the share of
Series C Preferred Stock, if any, to the date of final distribution.
If there is any voluntary or involuntary liquidation, dissolution or
winding-up of us, before any distribution of our assets to the holders of shares
of Series C Preferred Stock or any capital stock of ours ranking equally with
the shares of Series C Preferred Stock, the holders of any shares of capital
stock ranking senior to the Series C Preferred Stock shall be entitled to
receive out of our assets available for distribution to our stockholders,
whether from capital, surplus or earnings, an amount per share of the senior
stock equal to the liquidation preference of the senior stock, plus accrued and
unpaid dividends thereon, if any, to the date of final distribution.
If, upon any liquidation, dissolution or winding-up of us, the amounts
payable with respect to the shares of Series C Preferred Stock or any capital
stock ranking on a par with the shares of Series C Preferred Stock are not paid
in full, then the holders will share ratably in the distribution of assets, or
proceeds from the liquidation, dissolution or winding-up, in proportion to the
full respective preferential amounts to which they are entitled. Neither a
consolidation nor a merger of us with one or more other corporations, nor a sale
or a transfer of all or substantially all of our assets, will be deemed to be a
voluntary or involuntary liquidation, dissolution or winding-up of us.
Sinking Fund; Other Matters. We are not required to redeem the Series C
Preferred Stock under any sinking fund provisions. Holders of shares of
Series C Preferred Stock have no preemptive rights.
Transfer Agent. The transfer agent for the Series C Preferred Stock is
Continental Stock Transfer & Trust Company, New York, New York.
9.2% SERIES A JUNIOR CUMULATIVE CONVERTIBLE PREFERRED STOCK AND
9.2% SERIES B JUNIOR CUMULATIVE CONVERTIBLE PREFERRED STOCK
The board of directors has authorized the issuance of up to 4,300,000
shares of 9.2% Series A Junior Cumulative Convertible Preferred Stock and up to
2,100,000 shares of the 9.2% Series B Junior Cumulative Convertible Preferred
Stock. As of July 31, 1999, we had 1,350,000 shares of 9.2% Series A Junior
Cumulative Convertible Preferred Stock outstanding held of record by the Apollo
Investors.
37
<PAGE>
Dividends. The annual dividend rate per share of the Junior Preferred Stock
will be an amount equal to 9.2% of the sum of (1) the liquidation preference of
the Junior Preferred Stock and (2) all unpaid dividends, if any, whether or not
declared, from the date of issuance of the shares of Junior Preferred Stock (for
shares of 9.2% Series A Junior Cumulative Convertible Preferred Stock, the
'Closing Date' and, for shares of 9.2% Series B Junior Cumulative Convertible
Preferred Stock, the 'Option Closing Date') to the applicable dividend payment
date. Dividends on the shares of Junior Preferred Stock will be cumulative,
accruing annually and, when and as declared by our Board of Directors, will be
payable annually initially on November 15, 1999 and on each November 15
thereafter (each, a 'Junior Preferred Dividend Payment Date'). If any dividend
payable on any Junior Preferred Dividend Payment Date is not declared or paid on
the Junior Preferred Dividend Payment Date in full, in cash or in additional
shares of Junior Preferred Stock of the same series, then the amount of the
unpaid dividend ('Default Dividends') will be accumulated and will accrue
dividends, until paid, compounded annually at a rate equal to 15% per annum.
Dividends may be paid in cash, shares of Junior Preferred Stock of the same
series or any combination of cash and Junior Preferred Stock, at our option.
Default Dividends may only be paid in shares of Junior Preferred Stock of the
same series.
With respect to the payment of dividends, the 9.2% Series A Junior
Cumulative Convertible Preferred Stock ranks on a parity with the 9.2% Series B
Junior Cumulative Convertible Preferred Stock. If and so long as full cumulative
dividends payable on the shares of Junior Preferred Stock in respect of all
prior dividend periods have not been paid or set apart for payment and proper
provision has not been made so that holders of Junior Preferred Stock are
offered the opportunity to make a Payout Election instead of a Conversion Price
adjustment (as described below), we will not pay any dividends, except for
dividends payable in common stock or our capital stock ranking junior to the
Junior Preferred Stock in payment of dividends ('Junior Dividend Stock') or make
any distributions of assets on or redeem, purchase or otherwise acquire for
consideration shares of common stock or Junior Dividend Stock.
If and so long as any accrued and unpaid dividends payable on any shares of
our capital stock ranking senior to the Junior Preferred Stock in payment of
dividends have not been paid or set apart for payment, we will not pay any
dividends in cash on shares of Junior Preferred Stock. No dividends paid in cash
will be paid or declared and set apart for payment on any shares of Junior
Preferred Stock or of our capital stock ranking equally with the Junior
Preferred Stock in the payment of dividends ('Parity Dividend Stock') for any
period unless we have paid or declared and set apart for payment, or
contemporaneously pay or declare and set apart for payment, all accrued and
unpaid dividends on the Junior Preferred Stock for all dividend payment periods
terminating on or before the date of payment of these dividends; provided,
however, that all dividends accrued by us on shares of Junior Preferred Stock or
Parity Dividend Stock will be declared proportionately with respect to all
shares of Junior Preferred Stock and Parity Dividend Stock then outstanding,
based on the ratio of unpaid dividends on the Junior Preferred Stock to unpaid
dividends on the Parity Dividend Stock. No dividends paid in cash will be paid
or declared and set apart for payment on Junior Preferred Stock for any period
unless we have paid or declared and set apart for payment, or contemporaneously
pay or declare and set apart for payment, all accrued and unpaid dividends on
any shares of Parity Dividend Stock for all dividend payment periods terminating
on or before the date of payment of these dividends.
Redemption. Except as described below, shares of Junior Preferred Stock may
not be redeemed by us at our option before November 15, 2003. From and after
November 15, 2001 and before November 15, 2003, we may redeem shares of Junior
Preferred Stock, in whole or in part, at any time at a redemption price of 100%
of the liquidation preference of the shares of Junior Preferred Stock redeemed,
plus unpaid dividends, if any, whether or not declared, to the redemption date,
if the average closing price of the common stock as reported in The Wall Street
Journal or, at our election, other reputable financial news source, for the 20
consecutive trading days before the notice of redemption of the Junior Preferred
Stock (the 'Current Market Price') equals or exceeds $60 per share, as adjusted.
From and after November 15, 2003, we may redeem shares of Junior Preferred
Stock, in whole or in part, at any time at a redemption price of 100% of the
liquidation preference of the
38
<PAGE>
Junior Preferred Stock redeemed, plus unpaid dividends, if any, whether or not
declared, to the redemption date.
On November 15, 2011, we will be required to redeem all outstanding shares
of Junior Preferred Stock at a redemption price of 100% of the liquidation
preference of the Junior Preferred Stock redeemed, plus unpaid dividends, if
any, whether or not declared, to the redemption date.
The amount paid to the holders of shares of Junior Preferred Stock upon
redemption that is allocable to the liquidation preference of the shares of
Junior Preferred Stock will be paid in cash and the amount of any unpaid
dividends to be paid on the shares of Junior Preferred Stock redeemed will be
paid in cash, shares of Junior Preferred Stock of the same series or any
combination of cash and Junior Preferred Stock at our option.
Change of Control. Upon the occurrence of a Change of Control, we must make
an offer (a 'Change of Control Offer') to purchase all then outstanding shares
of Junior Preferred Stock at a purchase price in cash equal to 101% of their
liquidation preference, plus unpaid dividends (paid in cash), if any, whether or
not declared, to the date the shares are purchased; provided that if the
purchase of the Junior Preferred Stock would violate or constitute a default
under (1) our senior discount notes or the indenture relating to our senior
discount notes or (2) the indenture or indentures or other agreement or
agreements under which there may be issued or outstanding from time to time
other indebtedness of CD Radio ('Other Agreements') in an aggregate principal
amount not exceeding $450 million (less the amount, if any, of indebtedness
issued to replace, refinance or refund our senior discount notes) because we
have not satisfied all of our obligations under the indenture relating to our
senior discount notes and the Other Agreements arising from the Change of
Control (collectively, the 'Senior Obligations'), then we will be required to
use our best efforts to satisfy the Senior Obligations as promptly as possible
or to obtain the requisite consents necessary to permit the repurchase of the
Junior Preferred Stock, and until the Senior Obligations are satisfied or
consents are obtained, we will not be obligated to make a Change of Control
Offer.
With respect to the Junior Preferred Stock, a 'Change of Control' is
defined as the occurrence of any of the following events: (1) any 'person' or
'group' (as these terms are used in Sections 13(d) and 14(d) of the Exchange
Act) is or becomes the 'beneficial owner' (as defined in Rules 13d-3 and 13d-5
under the Exchange Act, except that a person shall be deemed to have 'beneficial
ownership' of all securities that the person has the right to acquire, whether
the right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than 40% of our total outstanding voting stock;
(2) we consolidate with or merge with or into another person or convey,
transfer, lease or otherwise dispose of all or substantially all of our assets
to any person, or any person consolidates with or merges with or into us, in a
transaction in which our outstanding voting stock is converted into or exchanged
for cash, securities or other property, other than, at all times when the senior
discount notes are outstanding, those transactions that are not deemed a 'Change
of Control' under the terms of the indenture relating to our senior discount
notes; (3) during any consecutive two-year period, individuals who at the
beginning of the period constituted our board of directors (together with any
new directors whose election to the board of directors, or whose nomination for
election by our stockholders, was approved by a vote of 66 2/3% of the directors
then still in office who were either directors at the beginning of the period or
whose election or nomination for election was previously so approved) cease for
any reason to constitute a majority of our board of directors then in office; or
(4) we are liquidated or dissolved or a special resolution is passed by our
stockholders approving the plan of liquidation or dissolution, other than, at
all times when our senior discount notes are outstanding, those transactions
that are not deemed a 'Change of Control' under the terms of the indenture
relating to our senior discount notes.
Notwithstanding the foregoing, no transaction or event will be deemed a
'Change of Control' if (1) all of the outstanding shares of common stock are to
be converted pursuant thereto solely into the right to receive, for each share
of common stock so converted, cash and/or shares of Qualifying Acquiror common
stock (valued at its Current Market Price) together having a value in
39
<PAGE>
excess of $30.30, (2) we have declared and paid all dividends on the Junior
Preferred Stock, whether or not theretofore declared or undeclared, to the date
of the Change of Control and the holders of Junior Preferred Stock have been
given reasonable opportunity to convert, before the Change of Control, any
shares of Junior Preferred Stock so issued as a dividend, and (3) immediately
following the event the number of shares of Qualifying Acquiror common stock
into which shares of Junior Preferred Stock have been converted (together with,
if shares of Junior Preferred Stock are to remain outstanding, any shares of
Qualifying Acquiror common stock into which all outstanding shares of Junior
Preferred Stock would be convertible) represent both (a) less than 5% of the
total number of shares of Qualifying Acquiror common stock outstanding
immediately after the Change of Control and (b) less than one third of the
number of shares of Qualifying Acquiror common stock that would be Publicly
Traded immediately after the event. The term 'Qualifying Acquiror common stock'
means the common stock of any corporation if listed on or admitted to trading on
the New York Stock Exchange, American Stock Exchange or Nasdaq, and the term
'Publicly Traded' means shares of Qualifying Acquiror common stock that are both
(a) held by persons who are neither officers, directors or Affiliates of the
corporation nor the 'beneficial owner' (as the term is defined in Rule 13d-3
under the Exchange Act) of 5% or more of the total number of shares then issued
and outstanding, and (b) not 'restricted securities' (as the term is defined in
Rule 144 of the Securities Act).
Conversion. Each share of Junior Preferred Stock may be converted at any
time, at the option of the holder, unless previously redeemed, into a number of
shares of common stock calculated by dividing the liquidation preference of the
Junior Preferred Stock (without unpaid dividends) by $30 (as adjusted from time
to time, the 'Conversion Price'). The Conversion Price will not be adjusted at
any time for unpaid dividends on the shares of Junior Preferred Stock, but will
be adjusted for the occurrence of some corporate events affecting the common
stock. Upon conversion, holders of the Junior Preferred Stock will be entitled
to receive any unpaid dividends upon the shares of Junior Preferred Stock
converted payable in cash, shares of common stock or a combination of cash and
common stock, at our option.
The Conversion Price for shares of Junior Preferred Stock will be adjusted
in some events, including (1) dividends and other distributions payable in
common stock on any class of our capital stock, (2) subdivisions, combinations
and reclassifications of the common stock, (3) the issuance to all holders of
common stock of rights or warrants entitling them to subscribe for or purchase
common stock at less than fair market value, (4) distributions to all holders of
common stock of evidence of our indebtedness or assets, (5) repurchases,
redemptions or other acquisitions of the common stock by us at a price per share
greater than the Current Market Price per share of common stock on the date of
the event, (6) issuance or sale of common stock by us at a price per share more
than 15% below (or, in the case of any issuance or sale to an affiliate of ours,
any amount below) the Current Market Price per share of common stock on the date
of the event (except for issuances to or through a nationally recognized
investment banking firm in which our affiliates purchase less than 25% of the
shares in the offering) and (7) a consolidation or merger to which we are a
party or the sale or transfer of all or substantially all of our assets.
The Conversion Price for shares of Junior Preferred Stock will not be
adjusted if (1) the adjustment would not require an increase or decrease of at
least 1% in the Conversion Price then in effect or (2) with respect to each
series of Junior Preferred Stock and in connection with an adjustment that would
be made in respect of a dividend, purchase, redemption or other acquisition,
holders of a majority of the outstanding shares of the series of Junior
Preferred Stock elect to participate in the dividend, purchase, redemption or
other acquisition (a 'Payout Election') proportionately with the holders of
common stock or capital stock ranking junior to the Junior Preferred Stock
('Junior Stock').
Voting Rights. So long as any shares of Junior Preferred Stock are
outstanding, each share of Junior Preferred Stock will entitle its holder to
vote, in person or by proxy, at any special or annual meeting of stockholders,
on all matters entitled to be voted on by holders of common stock voting
together as a single class with all other shares entitled to vote those matters.
With respect to these matters, each share of Junior Preferred Stock will entitle
its holder to cast that
40
<PAGE>
number of votes per share as is equal to the number of votes that the holder
would be entitled to cast had the holder converted its shares of Junior
Preferred Stock into shares of common stock on the record date for determining
our stockholders eligible to vote on these matters.
In addition to any vote or consent of stockholders required by law or by
our amended and restated certificate of incorporation, the consent of the
holders of at least a majority of the shares of a particular series of Junior
Preferred Stock at any time issued and outstanding will be necessary for
effecting or validating any reclassification of that series of Junior Preferred
Stock or amendment, alteration or repeal of any of the provisions of our amended
and restated certificate of incorporation or amended and restated by-laws which
adversely affects the voting powers, rights or preferences of the holders of the
shares of that series of Junior Preferred Stock. The consent of the holders of
at least a majority of the shares of Junior Preferred Stock at the time issued
and outstanding, acting as a single class, will be necessary for effecting or
validating any amendment, alteration or repeal of any of the provisions of our
amended and restated certificate of incorporation or amended and restated
by-laws which affects adversely the voting powers, rights or preferences of the
holders of the shares of both series of Junior Preferred Stock. Any amendment of
the provisions of our amended and restated certificate of incorporation so as to
authorize or create, or to increase the authorized amount of, any Junior Stock
will not be deemed to affect adversely the voting powers, rights or preferences
of the holders of shares of Junior Preferred Stock. The consent of at least a
majority of the shares of each series of Junior Preferred Stock will also be
necessary for:
(1) the authorization or creation of, or the increase in the
authorized amount of, or the issuance of any shares of any class or series
of, capital stock ranking senior to the Junior Preferred Stock ('Senior
Stock') or any security convertible into shares of any class or series of
Senior Stock;
(2) the authorization or creation of, or the increase in the
authorized amount of, or the issuance of any shares of any class or series
of capital stock ranking equally with the Junior Preferred Stock ('Parity
Stock') or any security convertible into shares of any class or series of
Parity Stock so that the aggregate liquidation preference of all
outstanding shares of Parity Stock (other than (x) shares of Junior
Preferred Stock issued under the stock purchase agreement, dated November
13, 1998, between us and Apollo Investment Fund IV, L.P. and Apollo
Overseas Partners, L.P. and (y) shares of Junior Preferred Stock issued as
a dividend in respect of shares issued in respect of (x) or (y)) would
exceed the sum of (A) $135,000,000 and (B) the aggregate liquidation
preference of the shares of 9.2% Series B Junior Cumulative Convertible
Preferred Stock issued at the Option Closing, if any;
(3) our merger or consolidation with or into any other entity, unless,
after the merger or consolidation, the resulting corporation will have no
class or series of shares and no other securities either authorized or
outstanding ranking before, or equally with, shares of Junior Preferred
Stock; provided, however, that no vote or consent of the holders of Junior
Preferred Stock will be required if before the time when the merger or
consolidation is to take effect, and regardless of whether the merger or
consolidation would constitute a Change of Control, a Change of Control
Offer is made for all shares of Junior Preferred Stock at the time
outstanding; and
(4) the application of any of our funds, property or assets to the
purchase, redemption, sinking fund or other retirement of any shares of any
class of Junior Stock, or the declaration, payment or making of any
dividend or distribution on any shares of any class of Junior Stock, other
than a dividend or dividends payable solely in shares of common stock or
Junior Stock of the same series, unless the holders of Junior Preferred
Stock have been offered the opportunity to make a Payout Election with
respect to this event.
In connection with the foregoing class rights to vote, each holder of
shares of Junior Preferred Stock shall have one vote for each share of Junior
Preferred Stock held. No consent of holders of Junior Preferred Stock is
required for the creation of any indebtedness of any kind of CD Radio.
41
<PAGE>
Liquidation. If we are voluntarily or involuntarily liquidated, dissolved
or wound up, the 9.2% Series A Junior Cumulative Convertible Preferred Stock
will rank on a parity with the 9.2% Series B Junior Cumulative Convertible
Preferred Stock, and before any distribution of our assets to the holders of
shares of common stock or any other class or series of Junior Stock, but after
payment of the liquidation preference payable on the Series C Preferred Stock or
any other class or series of Senior Stock, the holders of shares of Junior
Preferred Stock will be entitled to receive out of our assets available for
distribution to our stockholders, whether from capital, surplus or earnings, an
amount per share of Junior Preferred Stock equal to $100, plus accrued and
unpaid dividends on each share of Junior Preferred Stock, if any, to the date of
final distribution.
If we are voluntarily or involuntarily liquidated, dissolved or wound up,
before any distribution of our assets to the holders of shares of Junior
Preferred Stock or Parity Stock, the holders of any shares of Senior Stock will
be entitled to receive out of our assets available for distribution to our
stockholders, whether from capital, surplus or earnings, an amount per share of
Senior Stock equal to the liquidation preference of the Senior Stock, plus
accrued and unpaid dividends on the Senior Stock, if any, to the date of final
distribution.
If, upon any liquidation, dissolution or winding-up of us, the amounts
payable with respect to the shares of Junior Preferred Stock or any Parity Stock
are not paid in full, then holders of Junior Preferred Stock and Parity Stock
will share ratably in the distribution of assets, or proceeds of the
liquidation, dissolution or winding-up, in proportion to the full respective
preferential amounts to which they are entitled. Neither a consolidation nor a
merger of us with one or more other corporations, nor a sale or a transfer of
all or substantially all of our assets, will be deemed to be a voluntary or
involuntary liquidation, dissolution or winding-up of us.
Exchange. Shares of Junior Preferred Stock may be exchanged at any time and
from time to time, at our option, for our 9.2% Convertible Debentures (the
'Convertible Debt'). The Convertible Debt will be issued under an indenture
acceptable, in form and substance, to a majority of the holders of the Junior
Preferred Stock immediately before the effectiveness of the indenture.
The Convertible Debt will have a maturity date 13 years following the
Closing Date, a principal amount equal to the aggregate liquidation preference
of the shares of Junior Preferred Stock exchanged and will provide for the
payment of interest at a rate of 9.2% per annum, payable annually in cash or
additional Convertible Debt, at our option. The Convertible Debt will be
convertible and redeemable on terms substantially similar to those of the Junior
Preferred Stock.
Registration Rights. At any time after December 23, 2000, holders of shares
of 9.2% Series A Junior Cumulative Convertible Preferred Stock, or shares of
common stock into which shares of 9.2% Series A Junior Cumulative Convertible
Preferred Stock have been converted, representing, in the aggregate, at least
50% of the shares of common stock into which shares of 9.2% Series A Junior
Cumulative Convertible Preferred Stock have been or may be converted (assuming
conversion of the 9.2% Series A Junior Cumulative Convertible Preferred Stock)
('Series A Registrable Securities') will be entitled, on two occasions, to
require us to register the Series A Registrable Securities for sale in an
underwritten public offering by a nationally recognized investment banking firm
or firms reasonably acceptable to us. At any time after December 23, 2000,
holders of shares of 9.2% Series B Junior Cumulative Convertible Preferred Stock
or shares of common stock into which shares of 9.2% Series B Junior Cumulative
Convertible Preferred Stock have been converted representing, in the aggregate,
at least 50% of the shares of common stock into which shares of 9.2% Series B
Junior Cumulative Convertible Preferred Stock have been or may be converted
(assuming conversion of the 9.2% Series B Junior Cumulative Convertible
Preferred Stock) ('Series B Registrable Securities') will be entitled, on one
occasion, to require us to register the Series B Registrable Securities for sale
in an underwritten public offering by a nationally recognized investment banking
firm or firms reasonably acceptable to us.
If a demand registration would be seriously detrimental to us and our
stockholders, the demand registration may be deferred, at our request, twice in
any 12-month period, for an
42
<PAGE>
aggregate period of time of up to 90 days. In addition, holders of Junior
Preferred Stock will be bound by customary 'lockup' agreements at the request of
the managing underwriter of any public offering on our behalf. If we plan to
file a registration statement on behalf of one or more security holders, holders
of Junior Preferred Stock also have the right, taking into account customary
limitations and the rights of the other security holders, to request that the
registration include their Registrable Securities. Holders of Junior Preferred
Stock or Registrable Securities are entitled to an unlimited number of these
'piggy-back' registrations.
Tag-Along Agreement. David Margolese, our Chairman and Chief Executive, and
we also entered into a tag-along agreement with the Apollo Investors. Under the
tag-along agreement, if Mr. Margolese sells more than 800,000 shares of our
common stock before the earlier of the date that the Apollo Investors
beneficially own less than 2,000,000 shares of the common stock or the date that
is six months after the nationwide commercial introduction of our service, then
the Apollo Investors have rights to sell, proportionately with Mr. Margolese, a
portion of the common stock owned by them in any subsequent transaction in which
Mr. Margolese disposes of 80,000 or more shares of our common stock.
REGISTRATION RIGHTS
In connection with the sale of 5,000,000 shares of common stock to Prime
66, we granted registration rights to Prime 66. Prime 66 has the right to make
two demands, at any time after October 1, 2000, which will require us to use our
best efforts to effect the registration of Prime 66's shares of common stock.
In addition, if we determine to register any shares of common stock for one
or more security holders, Prime 66 has the right, taking into account customary
limitations and the rights of the other security holders, to request that the
registration include Prime 66's common stock. Prime 66 is entitled to an
unlimited number of these 'piggy-back' registrations.
DESCRIPTION OF WARRANTS
We may issue warrants for the purchase of debt securities, preferred stock,
common stock or any combination thereof. Warrants may be issued independently or
together with any other securities offered in an applicable prospectus
supplement and may be attached to or separate from such securities. Warrants may
be issued under warrant agreements (each, a 'warrant agreement') to be entered
into between us and a warrant agent specified in the applicable prospectus
supplement. The warrant agent will act solely as our agent in connection with
the warrants of a particular series and will not assume any obligation or
relationship of agency or trust for or with any holders or beneficial owners of
warrants. The following sets forth certain general terms and provisions of
warrants which may be offered. Further terms of the warrants and the applicable
warrant agreement will be set forth in an applicable prospectus supplement.
DEBT WARRANTS
The prospectus supplement relating to a particular issue of warrants to
issue debt securities ('debt warrants') will describe the terms of the debt
warrants, including the following:
the title of the debt warrants;
the offering price for the debt warrants, if any;
the aggregate number of the debt warrants;
the designation and terms of the debt securities purchasable upon exercise
of the debt warrants;
if applicable, the designation and terms of the debt securities that the
debt warrants are issued with and the number of debt warrants issued with
each debt security;
if applicable, the date from and after which the debt warrants and any
debt securities issued with them will be separately transferable;
43
<PAGE>
the principal amount of debt securities that may be purchased upon
exercise of a debt warrant and the price at which the debt securities may
be purchased upon exercise (which may be payable in cash, securities or
other property);
the dates on which the right to exercise the debt warrants will commence
and expire;
if applicable, the minimum or maximum amount of the debt warrants that may
be exercised at any one time;
information with respect to book-entry procedures, if any;
the currency or currency units in which the offering price, if any, and
the exercise price are payable;
if applicable, a discussion of material United States federal income tax
considerations;
the antidilution provisions of the debt warrants, if any;
the redemption or call provisions, if any, applicable to the debt
warrants; and
any additional terms of the debt warrants, including terms, procedures,
and limitations relating to the exchange and exercise of the debt
warrants.
STOCK WARRANTS
The prospectus supplement relating to a particular issue of warrants to
issue common stock or preferred stock will describe the terms of the warrants,
including the following:
the title of the warrants;
the offering price for the warrants, if any;
the aggregate number of the warrants;
the designation and terms of the common stock or preferred stock that may
be purchased upon exercise of the warrants;
if applicable, the designation and terms of the securities that the
warrants are issued with and the number of warrants issued with each
security;
if applicable, the date from and after which the warrants and any
securities issued with the warrants will be separately transferable;
the number of shares of common stock or preferred stock that may be
purchased upon exercise of a warrant and the price at which such shares
may be purchased upon exercise;
the dates on which the right to exercise the warrants will commence and
expire;
if applicable, the minimum or maximum amount of the warrants that may be
exercised at any one time;
the currency or currency units in which the offering price, if any, and
the exercise price are payable;
if applicable, a discussion of material United States federal income tax
considerations;
the antidilution provisions of the warrants, if any;
the redemption or call provisions, if any, applicable to the warrants; and
any additional terms of the warrants, including terms, procedures, and
limitations relating to the exchange and exercise of the warrants.
EXERCISE OF WARRANTS
Each warrant will entitle the holder of warrants to purchase for cash the
amount of shares of preferred stock, shares of common stock or debt securities
at the exercise price as shall in each case be set forth in, or be determinable
as set forth in, the prospectus supplement relating to the warrants offered
thereby. Warrants may be exercised at any time up to the close of business on
44
<PAGE>
the expiration date set forth in the prospectus supplement relating to the
warrants offered thereby. After the close of business on the expiration date,
unexercised warrants will become void.
Warrants may be exercised as set forth in the prospectus supplement
relating to the warrants offered thereby. Upon receipt of payment and the
warrant certificate properly completed and duly executed at the corporate trust
office of the warrant agent or any other office indicated in the prospectus
supplement, we will, as soon as practicable, forward the shares of preferred
stock, shares of common stock or debt securities purchasable upon such exercise.
If less than all of the warrants represented by the warrant certificate are
exercised, a new warrant certificate will be issued for the remaining warrants.
WARRANTS TO PURCHASE SERIES C PREFERRED STOCK
In connection with the issuance of a class of preferred stock which is no
longer outstanding, we issued warrants as of April 9, 1997, to Libra
Investments, Inc. ('Libra') and some individuals and entities designated by
Libra. These warrants may be exercised for an aggregate of 177,178 shares of
Series C Preferred Stock. Holders of these warrants may exercise their warrants
until April 9, 2002, at an exercise price which declines every month. During
July 1999, the exercise price for each of these warrants was $66.05 per share of
Series C Preferred Stock.
THE UNIT OFFERING WARRANTS
On May 18, 1999, we issued units composed of our 14 1/2% senior secured
notes due 2009 and warrants to purchase an aggregate of 2,190,000 shares of
common stock at a price of $28.60 per share. These warrants were issued under a
warrant agreement, dated as of May 15, 1999, between us, as issuer, and United
States Trust Company of New York, as warrant agent. The number of shares of
common stock to be issued under these warrants will be adjusted in some cases if
we issue additional shares of common stock, options, warrants or convertible
securities and in some other events. These warrants will expire on May 15, 2009.
Under the warrant agreement for these warrants, holders can not exercise their
warrants before the earlier to occur of: (1) the effective date of a change in
our control and (2) May 18, 2000.
We have agreed to file and have declared effective a shelf registration
statement covering the resale of the unit offering warrants within 150 days
after the issuance of the warrants, and, to cause the shelf registration
statement to remain effective until the earliest of (1) two years after the
issuance of the unit offering warrants, (2) the time when all unit offering
warrants have been sold under the shelf registration statement and (3) the time
when the unit offering warrants can be sold by persons who are not our
affiliates without restriction under the Securities Act.
We have also agreed to file and have declared effective a shelf
registration statement covering the issuance of the shares of common stock
issuable upon the exercise of the unit offering warrants and to cause this shelf
registration statement to remain effective until the earlier of (1) the time
when all unit offering warrants have been exercised and (2) May 15, 2009.
Holders of these warrants and shares of common stock received upon exercise
of these warrants will also have the right to include these warrants and shares
of common stock received upon exercise of these warrants in any registration
statement we file under the Securities Act for our account or for any holders of
our common equity securities, with some exceptions.
THE FORD WARRANT
On June 15, 1999, we issued a warrant to Ford which entitles Ford to
purchase up to 4,000,000 shares of our common stock at a purchase price of
$30 per share.
Under this warrant agreement, Ford's right to exercise this warrant vests
as follows:
with respect to 1,000,000 shares of common stock, on the date that Ford
has manufactured 500,000 new vehicles containing CD Radio receivers ('Ford
Enabled Vehicles');
45
<PAGE>
with respect to an additional 500,000 shares of common stock, on the date
that Ford has manufactured an aggregate of 1,000,000 Ford Enabled
Vehicles;
with respect to an additional 500,000 shares of common stock, on the date
that Ford has manufactured an aggregate of 2,000,000 Ford Enabled
Vehicles;
with respect to an additional 1,000,000 shares of common stock, on the
date that Ford has manufactured an aggregate of 3,000,000 Ford Enabled
Vehicles; and
with respect to an additional 1,000,000 shares of common stock, on the
date that Ford has manufactured an aggregate of 4,000,000 Ford Enabled
Vehicles.
The number of shares of common stock to be issued under this warrant will
be adjusted in some cases if we issue stock dividends, combine stock, reorganize
or reclassify capital stock, merge, sell all of our assets and in some other
events. This warrant will expire on the earlier of June 11, 2009 and the date of
termination or expiration of the agreement, dated June 11, 1999, between us and
Ford.
We are required to give Ford notice of adjustments in the number of shares
issuable under this warrant and of extraordinary corporate events. If we issue
shares of common stock in an underwritten public offering, we also must notify
Ford and offer to issue Ford, for cash at an equal price, the number of shares
of common stock required so that Ford will have the same percentage of the total
number of shares of common stock issued and outstanding immediately prior to the
offering as after giving effect to the offering. Ford, however, must exercise
this preemptive purchase right within five days after receiving notice from us
and must purchase its common shares simultaneous with the closing of the
offering.
PLAN OF DISTRIBUTION
We may sell the securities:
(1) to one or more underwriters or dealers for public offering and sale by
them and
(2) to investors directly or through agents.
The distribution of securities may be effected from time to time in one or
more transactions at a fixed price or prices (which may be changed from time to
time), at market prices prevailing at the time of sale, at prices related to
such prevailing market prices or at negotiated prices. Each prospectus
supplement will describe:
(1) the method of distribution of the securities offered thereby;
(2) the purchase price and the proceeds we will receive from the sale; and
(3) any securities exchanges on which the securities of such series may be
listed.
In connection with the sale of the securities, underwriters, dealers or
agents may receive compensation from us or from purchasers of the securities for
whom they may act as agents, in the form of discounts, concessions or
commissions. The underwriters, dealers or agents that participate in the
distribution of the securities may be deemed to be underwriters under the
Securities Act and any discounts or commissions received by them and any profit
on the resale of the securities received by them may be deemed to be
underwriting discounts and commissions thereunder. Any such underwriter, dealer
or agent will be identified and any such compensation received from us will be
described in the applicable prospectus supplement. Any initial public offering
price and any discounts or concessions allowed or paid to dealers may be changed
from time to time.
Under the agreements that may be entered into with us, underwriters,
dealers and agents may be entitled to indemnification by us against certain
civil liabilities, including liabilities under the Securities Act, or to
contribution with respect to payments which the underwriters, dealers or agents
may be required to make in respect thereof.
Each underwriter, dealer and agent participating in the distribution of any
securities that are issuable in bearer form will agree that it will not offer,
sell, resell or deliver, directly or indirectly, securities in bearer form to
persons located in the United States or to United States persons (other than
qualifying financial institutions), in connection with the original issuance of
the securities.
46
<PAGE>
Certain of the underwriters or agents and their associates may be customers
of, engage in transactions with and perform services for us in the ordinary
course of business.
Certain persons participating in an offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the securities,
including over-allotment, stabilizing and short-covering transactions in such
securities, the imposition of a penalty bid, and bidding for and purchasing
shares of the common stock in the open market during and after an offering.
LEGAL MATTERS
Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York, will pass
upon specific legal matters with respect to the securities. Certain regulatory
matters arising under the Communications Act will be passed upon by Wiley, Rein
& Fielding, Washington, D.C.
EXPERTS
Our consolidated financial statements as of December 31, 1997 and 1998, and
for each of the three years in the period ended December 31, 1998, and for the
period from May 17, 1990 (date of inception) to December 31, 1998, included in
this prospectus have been so included in reliance on the report (which contains
an explanatory paragraph relating to our ability to continue as a going concern,
as described in Note 2 to the financial statements) of PricewaterhouseCoopers
LLP, independent accountants, given on the authority of said firm as experts in
accounting and auditing.
INCORPORATION BY REFERENCE
The SEC allows us to 'incorporate by reference' in this prospectus other
information we file with them, which means that we can disclose important
information to you by referring you to those documents. The information
incorporated by reference is an important part of this prospectus, and
information that we file later with the SEC will automatically update and
supersede this information. We incorporate by reference the documents listed
below and any future filings made with the SEC under Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act until we sell all of the securities covered by this
prospectus.
1. Our Annual Report on Form 10-K for the year ended December 31, 1998.
2. Our Quarterly Reports on Form 10-Q for the fiscal quarters ended
March 31, 1999 and June 30, 1999.
3. Our Current Reports on Form 8-K dated February 4, 1999, April 9, 1999,
April 16, 1999, May 3, 1999, May 25, 1999 and June 15, 1999.
4. The description of our common stock contained in our Registration
Statement on Form 8-A filed pursuant to Section 12(b) of the Exchange
Act and declared effective on September 13, 1994 (including any
amendment or report filed for the purpose of updating such description).
We have filed each of these documents with the SEC and they are available
from the SEC's Internet site and public reference rooms described under 'Where
You May Find Additional Available Information About Us' below. You may also
request a copy of these filings, at no cost, by writing or calling us at the
following address or telephone number:
Patrick L. Donnelly
Senior Vice President, General Counsel and Secretary
CD Radio Inc.
1221 Avenue of the Americas, 36th Floor
New York, New York 10020
(212) 584-5100
You should rely only on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. We have not authorized
anyone else to provide you with different information.
47
<PAGE>
WHERE YOU MAY FIND ADDITIONAL AVAILABLE INFORMATION ABOUT US
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any of these reports, statements
or other information at the SEC's public reference room at 450 Fifth Street,
N.W., Washington, D.C. 20549 or at its regional offices in New York City, New
York, and Chicago, Illinois. You can request copies of those documents, upon
payment of a duplicating fee, by writing to the SEC. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms. Our SEC
filings are also available to the public at the SEC's Internet site at
http://www.sec.gov.
48
<PAGE>
(This page intentionally left blank)
<PAGE>
(This page intentionally left blank)
<PAGE>
Inside back cover
Photograph of some of the CD Radio Programming team members on and around a
scaffold.
Caption: CD Radio Programming Team
Top Row: Don Kaye (Rock), Michele Miller (Classical), Tom Versen
(Director, Production/Creative Services)
Middle Row: Russell Davis (Jazz), Steve Warren (Country), Pat St.
John (Rock), Felix Hernandez (R&B), Cindy Sivak (Director,
Industry/Talent Affairs), Swedish Egil (Rhythmic)
On the Floor: Kenny Washington (Jazz), Jerry Rubino (Rock), Gabe
Romero (Latin), Him Kressler (Country), Ken Spellman (R&B), Maria
Carchidi (Director, Music Programming)
<PAGE>
________________________________________________________________________________
$125,000,000
[LOGO]
8 3/4% CONVERTIBLE SUBORDINATED NOTES DUE 2009
-------------------------------------------------
PROSPECTUS SUPPLEMENT
-------------------------------------------------
MERRILL LYNCH & CO.
LEHMAN BROTHERS
BEAR, STEARNS & CO. INC.
BANC OF AMERICA SECURITIES LLC
SEPTEMBER 23, 1999
________________________________________________________________________________
